Economists expect the key CPI inflation measure to ease in September despite price pressures in some categories such as used cars.

The trend of slower month-on-month inflation is expected to continue

According to a Bloomberg survey of economists, the month-on-month growth rate of CPI and the month-on-month growth rate of core CPI excluding food and energy may be recorded at 0.1% and 0.2% respectively.

The year-on-year growth rate of the overall CPI is expected to be 2.3%, which will be the lowest growth rate since the beginning of 2021. The year-on-year growth rate of the core CPI is expected to be 3.2% for the second consecutive month.

The recent decline in inflation has been helped by lower oil prices and the exclusion of several high CPI readings in 2023 from calculations. Some analysts believe that a further decline in the annual CPI rate to 2% this year may not be feasible. Oil prices have risen again recently, and some costs such as housing and transportation remain high.

The core CPI is seen as a better signal of future inflation. Grocery and gasoline prices can sometimes swing wildly and overstate the overall level of prices. A big increase in the core CPI could rattle financial markets and reignite talk of a “pause” in the Fed’s rate cuts — a move it could abandon in November or December if further progress on inflation stalls.

Housing inflation

Rents and house prices are the biggest sources of inflation and are also the most stubborn cost items.

Over the past two years, the Fed has been counting on a sharp slowdown in housing costs to bring U.S. inflation down to its 2% target.

However, this is not the case. Year-on-year growth in housing costs has fallen from its peak of 8.1% in 2023, but remains above 5%.

The annual rate of housing costs actually rose to 5.2% in August from 5.1% the month before. Before the pandemic, housing costs were rising modestly by about 3% per year.

"One thing to watch is housing inflation, and even though the Fed has been slow to make progress on that front, we believe that housing inflation will also normalize over time," said BeiChen Lin, investment strategist at Russell Investments.

Car Prices

Most forecasters expect used car prices to rebound after months of declines, which would put pressure on core commodity prices.

Economists at Pantheon Macroeconomics believe that higher container shipping prices in the future could have an impact on the category.

“Transport costs are reflected in the CPI with a lag of at least six months, so the impact of the near doubling of container freight rates at the start of the year is likely to be gradually reflected in core CPI commodity prices over the coming months,” Samuel Tombs and Oliver Allen wrote on Tuesday.

The cost of transportation services, including car insurance, repairs and airline fares, has been another inflation hotspot.

The annual rate of increase in prices for these transportation services is still close to 8%. This is down from a peak of 15% nearly two years ago, but it is still well above the average of 1.8% between 2010 and 2019.

If the data are in line with consensus, they are unlikely to have much impact on the Fed’s next policy decision in November.

“Even if core CPI beats expectations, we don’t think the September report will change the FOMC’s view that inflation is trending downward,” Anna Wong, chief U.S. economist at Bloomberg Economics, wrote in a report Thursday, predicting the Fed will cut interest rates by 25 basis points in November.

Strong wages

Economists say wages, the main engine of consumer spending, are another upside risk to inflation. Real wages rose by the most in a year in August. They could pose a bigger upside risk to inflation in the future after nearly 50,000 dockworkers negotiated a big pay raise and 33,000 Boeing employees are currently on strike to negotiate a wage deal.

“Persistent strength in wages would be a notable upside risk to inflation, particularly in services sectors such as health care,” Citigroup economists Veronica Clark and Andrew Hollenhorst wrote in a note Tuesday.

Impact on PCE

Rising used car prices would be bad news for consumers, especially when combined with high auto insurance inflation, but would have little impact on the Fed's preferred inflation measure, the personal consumption expenditures price index (PCE), which is trending toward the Fed's 2% target.

“Used cars have a lower weight in core PCE, so their acceleration has a smaller impact on PCE,” Morgan Stanley economists led by Diego Anzoategui wrote last week. “Used cars account for about 2% of the CPI basket and 1.2% of the PCE basket.”

Gold Technical Analysis

Even after gold prices closed below the key 21-day simple moving average (SMA) support level at $2,619 on Wednesday, bulls continued to defend their positions.

Gold bulls remain hopeful about a potential reversal as the 14-day relative strength index (RSI) remains above the 50 level.

On the downside, the primary support is seen at the $2,600 mark. A sustained break below this level could extend the decline to the September 20 low of $2,585.

On the other hand, gold prices need to recapture the 21-day SMA support-turned-resistance level, now at $2,623, to revive the uptrend. The next bullish target is at the psychological level of $2,650 and the short-term high near $2,670.

The article is forwarded from: Jinshi Data