Global Economic Weekly

November 11, 2022

Ethan Harris, Head of Global Economics, BofA Global Research

Finally Some Good News on Inflation

Headline and core CPI (Consumer Price Index) inflation for October came in below our expectations and the consensus. As a result, headline inflation fell to 7.7% year over year (y/y), from 8.2%, and the core CPI slipped to 6.3% y/y, from 6.6% previously. This was also only the second headline print below consensus in the last 12 months. Non-core components propped up the headline as energy prices advanced by 1.8% month over month (m/m), its first increase in four months, and food price inflation moderated but remained elevated at 0.6% m/m.


The weaker-than-expected reading on core inflation was driven by the sharp 0.4% drop in core goods prices (we were looking for a more modest decline of 0.1% m/m), as used car prices plunged 2.4% m/m and goods deflation showed signs of broadening. Apparel prices fell by 0.7% m/m, the third decline in the last four months, likely reflecting some discounting on account of excess inventories, and household furnishings dropped 0.2% m/m, with appliances falling for a fourth consecutive month. Elsewhere, education commodities declined by 0.9% m/m, its fourth consecutive monthly drop.


The downside surprise in core goods prices is welcome news for an economy struggling with high inflation and recent trends are consistent with our view that much of the expected disinflation in the coming year will likely come on account of a slower pace of increases in some core goods components, and outright declines in others. The main durables categories – new vehicles, used cars and household furnishings – could see substantial price declines as supply chain disruptions gradually clear, inventories recover, and financial conditions remain tight.


That said, incoming information on October inflation continues to point to firm price pressures in services. Core services within the CPI advanced by 0.5% m/m, only slightly below its average monthly increase in the third quarter (0.6% m/m). Shelter inflation rose by a solid 0.8% m/m, though OER (Owner’s Equivalent Rent) (0.6% m/m vs 0.8% m/m in September) and rent (0.7% m/m vs 0.8% m/m) did moderate somewhat. We see potential for disinflation in shelter given recent rental price data, which tend to lead official CPI rent estimates by about two quarters, but this may not show through clearly until the first half of next year. We now expect core CPI inflation to finish the year at 6.1% y/y compared to 6.3% y/y previously. For 2023, we forecast core CPI to fall to 3.1% y/y, a touch below our prior forecast of 3.2% y/y.


October CPI affirms slower pace, but not lower terminal

Financial markets reacted quickly and forcefully to the downside surprise to October inflation, taking a little more than one 25bp (basis point) rate hike out of the expected terminal rate based on changes in federal funds rate futures prices. In our view, while the softening in October inflation will be welcome news to FOMC (Federal Open Market Committee) participants, we doubt that it meaningfully changes participants' estimates of the appropriate policy path in the near term. At 0.5% m/m, services inflation remains well above what the Fed thinks is consistent with stable prices. Our own view is that the terminal rate – how high the Fed gets and when it gets there – is more about slowing payroll growth than near-term outturns on inflation. We retain our forecast of a terminal target range of 5.0-5.25%, to be reached in March of next year, and the October inflation report makes us more confident of a downshift to a 50bp hike in December.


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