October CPI Suggests Inflation May be Slowing as Housing Demand Continues to Weaken

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.4 percent in October, the same gain as in September, according to the Bureau of Labor Statistics. On an annual basis, prices were up 7.7 percent, a deceleration of five-tenths from September. After three months of significant declines, gasoline prices increased 4.0 percent. Food prices rose 0.6 percent over the month, the slowest rate since December 2021. Excluding food and energy, core CPI increased 0.3 percent in October and 6.3 percent from a year ago, decelerations of three-tenths for each compared to September data. Core goods declined 0.4 percent as used vehicle prices fell 2.4 percent (their fourth consecutive monthly decline) and apparel prices were down 0.7 percent. Shelter costs continued to grow at a robust rate, however, rising 0.8 percent over the month and 6.9 percent over the year, new cyclical highs. Still, owners’ equivalent rent slowed to a 0.6 month-over-month gain from 0.8 percent in September, and rent of primary residence was up 0.7 percent, a deceleration of one-tenth.
• The National Federation of Independent Business (NFIB) Optimism Index declined 0.8 points to 91.3 in October, breaking a streak of three consecutive modest increases. On net, 20 percent of firms plan to increase employment, a 3-point drop from September, while 46 percent of firms continue to report having positions they are not able to fill, unchanged from last month. On net, negative 13 percent of firms expect real sales to be higher in the next six months, a 3-point drop. While the net percentage of firms who reported raising average prices and raising worker compensation each ticked down, the net percentage of firms planning such increases rose: 34 percent of firms plan to raise selling prices, a 3-point increase, and 32 percent of firms plan to raise worker compensation, a 9-point jump returning the level to survey highs set at the end of 2021. Inflation continues to be reported as the single largest concern for a plurality of small businesses, rising 3 points from last month to 33 percent.
• Consumer (non-mortgage) credit outstanding increased by $25.0 billion in September, a modest slowdown from the $30.2 billion increase in August, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $8.3 billion, the smallest increase since May. Nonrevolving credit (largely student and auto loans) increased by $16.7 billion.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in October, reported a modest net tightening of lending standards for subprime and jumbo residential loan types, while for other categories lending standards were essentially unchanged. For the fifth consecutive quarter, there was a decline in reported demand for all mortgage types.

Forecast Impact:

October inflation data was somewhat cooler than anticipated and may cause a modest downgrade to our near-term inflation forecast. We had long predicted that goods prices would eventually drag on CPI as supply chain pressures eased and demand declined, which finally materialized in this report. Core services prices also eased thanks to a decline in medical care prices that will likely continue for some time due to the lagged nature of how health insurance costs are calculated, though overall core service inflation remains high as shelter inflation continues to increase. Still, we know that shelter is a lagging indicator and that home prices are beginning to decline, and private measures of rent increases have slowed and may outright decline in the coming months. Though we don’t believe this one report will significantly affect the Fed’s current aggressive tightening stance (and note that single months of inflation data can be volatile), we do view this as sign that inflationary pressures are generally slowing.

The SLOOS survey showed another large decline in mortgage demand this month, in line with our expectations for a continued slowing in home sales and activity generally. Fannie Mae’s loan performance data through September 2022 shows that more than 50 percent of current active FRM30 loans on our book have a mortgage rate more than 2 percentage points below September market rates, and more than 80 percent of borrowers have a mortgage rate at least 1 percentage point below market rates, by far the largest share of such borrowers in recent history. This represents a significant financial disincentive to move (the so-called “lock-in effect”), which we believe will continue to significantly weigh on demand for mortgages and home sales in the near to medium term.  

Nathaniel Drake
Economic and Strategic Research Group
November 10, 2022

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