Inflation Remains Red Hot, Weighing on Business Sentiment

Key Takeaways:

• The Consumer Price Index (CPI) surged 0.9 percent in October, matching the recent peak in June and accelerating five-tenths from September, according to the Bureau of Labor Statistics (BLS). On an annual basis, prices were up 6.2 percent, the fastest growth rate since 1990. Core CPI increased 0.6 percent over the month and 4.6 percent over the year, the fastest annual growth rate since 1991. Inflation was relatively broad-based, though energy disproportionately contributed, jumping 4.8 percent. Food prices rose 0.9 percent, while new vehicle prices increased 1.4 percent and used car and truck prices were up 2.5 percent. Healthcare prices rose 0.5 percent over the month, while owners’ equivalent rent increased 0.4 percent and was up 3.1 percent over the year, the fastest annual rate since May 2020.
• The Producer Price Index (PPI) for final demand of goods and services increased 0.6 percent, while core PPI rose 0.4 percent, an acceleration of three-tenths from last month according to the BLS. On an annual basis, the PPI increased 8.6 percent, tying the series record set last month, while core PPI rose 6.3 percent, the second fastest annual pace of growth in series history. The PPI is generally thought to lead the CPI as businesses look to pass on rising costs to consumers, meaning record highs could keep CPI readings elevated in the coming months.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 0.9 points in October to 98.2, the lowest level since March. On net, negative 37 percent of respondents expect the economy to improve, the lowest percentage since 2012 when the economy was still dealing with the fallout from the financial crisis. The net percentage of firms planning to increase employment remained unchanged at 26 percent. On net, 44 percent of firms report that they are raising worker compensation, a series record and an increase of 2 points from September. Similarly, a net 51 percent of respondents say they plan to raise selling prices, up 5 points from September to set a new series record.
• The Federal Reserve Board Senior Loan Officer Opinion Survey in the three months ending in October showed an easing of lending standards for most residential mortgage loan categories and HELOCs, particularly for jumbo loans. Meanwhile, credit standards for government residential and subprime mortgages remained unchanged. Regarding demand, a negative share of banks reported stronger demand for mortgages for the first time since Q2 2019, signaling a possible pullback from the demand spike earlier in the year.

Forecast Impact:

Though few of the major contributors to headline CPI were a surprise, the inflationary pressure was generally higher than expected and will likely lead to an increase to our short-term inflation forecast. Perhaps more importantly, the categories driving the increase were broad-based rather than being concentrated in a handful of COVID-sensitive industries, adding to the case of more persistent, general inflation occurring, which is further supported by the NFIB survey showing further increases in the number of firms planning on raising prices. Still, the significant spike in the headline CPI number was partially caused by yet another increase in new and used auto prices, and energy prices were a disproportionate driver. Our longer-term expectation is still that car prices will eventually drag on CPI, but that near-term car prices are likely to remain high and potentially will climb even further. Additionally, though surging energy costs were in line with our Q4 outlook, October’s reading was somewhat higher than expected. Energy price volatility will likely persist through the winter, but these increases will likely moderate as both natural gas and gasoline prices have stabilized in recent weeks. Still, high energy prices could cause a downgrade to our near-term personal consumption forecast as spending on utilities cuts into discretionary income and higher prices at the pump, as well as at grocery stores where food costs continued to rise, generally weighing on consumer sentiment. Inflation is likely to weigh on business sentiment, as well, as the PPI remained at a record high and small business expectations for economic growth continued to fall. However, despite rising labor costs, the net percentage of firms planning to increase employment and worker compensation remained high, suggesting that future payroll employment gains should remain strong. Given the combination of increasing wages and a continual increase in the net percentage of firms planning on raising their prices, we believe the risk of a wage-price spiral remains.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
November 12, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.