The U.S. Bureau of Labor Statistics (BLS) released its findings on September's Consumer Price Index (CPI) report. The report showed a rise of 0.4% month-over-month (MoM) in September on a seasonally-adjusted basis, following an increase of 0.6% in August. Year-over-year (YoY), the index increased 3.7% before seasonal adjustments.

This inflation print shows that headline inflation continues its pace from the last two months, but core inflation is cooling slightly. What’s more, our strategists believe that this slowdown in momentum is likely to continue. On this, Shawn Snyder, Global Investment Strategist for J.P. Morgan Wealth Management, says, “We are now entering the stage where further price deceleration will become more difficult. Most guideposts continue to point towards further price moderation in the year ahead, but going from 9.1% in June 2022 to 3.7% in September 2023 will likely look much easier than going from 3.8% to 2.0% will. Even the Federal Reserve is not projecting 2.0% headline inflation until either 2025 or 2026.”

Gasoline continues to rise, shelter follows suit

Two significant factors stood out in this month's increase: shelter and gasoline. The former notably shouldered over half of the total inflation reading, underlining the continuing growth in demand and the limited supply in the housing sector. Gasoline also rose as oil prices marched steadily higher toward the end of the summer. However, this seems to align with our strategists’ expectations. “What is not a surprise is that shelter prices continued to be the largest contributing factor to price gains, accounting for half of the increase. However, with national home prices largely flat YoY, we should see shelter prices moderate heading into 2024,” commented Snyder.

In September, the shelter index grew by 0.6%, double the 0.3% increase observed in August. Breaking it down further, the index for rent saw a rise of 0.5% for the month. Simultaneously, the index reflecting owners' equivalent rent went up by 0.6%. Most notably, the lodging away from home index jumped an eye-popping 3.7%, effectively halting its three-month decline.

Such prominent increases in the shelter sector made it the predominant contributor to the monthly uptick in the index for all items, excluding the volatile food and energy components. But while the shelter index led the charge, several other sectors also posted gains. The motor vehicle insurance index saw an increase of 1.3%, although it was a deceleration from the 2.4% rise in the preceding month. September also witnessed hikes in the indexes for recreation, personal care, new vehicles, and household furnishings and operations.

Used cars and trucks experienced a downward shift, dropping by 2.5% in September, following a 1.2% decline in August. The apparel sector also recorded a slump of 0.8% during the month. The communication index, in contrast, remained unchanged.

Implications moving forward

Policy makers have kept a close eye on possibly inflationary pressures – on the wages front, average hourly earnings are between 4% and 4.5%, depending on the metric. “If we exclude shelter prices, services prices fell from 3.1% in August to 2.8% in September. It’s important to see that metric slowing because services prices are thought to be more correlated with workers’ wages. With the Fed trying to cool the labor market, a continued cooling in that component will likely be viewed as a positive,” Snyder noted. But while the data from August points to the fact that wages are growing, they might be doing so at a decelerating rate. This has implications for consumer spending power in the face of rising prices.

The inflation picture has been an international phenomenon since the end of the pandemic. Between July and August, 14 Organization for Economic Cooperation and Development (OECD) nations experienced surges in inflation, with a significant 0.5 percentage points or more recorded in nine of these countries. This international trend underscores the universal challenges that central banks, including the Fed, are facing. However, it also shows that inflation in the U.S. is moderating more quickly than in other countries. The wars in Ukraine and now Israel are adding uncertainty to the economic picture, which could put a natural damper on economic growth – even though it could also boost oil prices. Notably, Treasury yields dipped after the war in Israel began as investors flocked to the safe haven of U.S. Treasury securities.

Given the domestic inflationary pressures magnified by global trends, eyes are keenly set on the Fed's next moves; at their recent meeting in September, the possibility of another rate hike in 2023 was on the table. Snyder, however, doesn’t foresee this happening. “The September CPI came in a bit hotter than expected, but probably not hot enough to put a November rate hike back on the table. We think the Fed’s mindset is increasingly shifting towards a “wait and see” approach – particularly with rising geopolitical tensions,” he remarked.

However, voices within the Fed, including that of Governor Christopher Waller, are hinting that the board might hold steady on rates, relying instead on natural economic dynamics to play their role in tempering inflation.

The bottom line

In essence, the economic trajectory of the U.S., intertwined with global inflationary trends, will significantly influence the Fed's policies in the coming months. To learn more about how these developments may impact your investment strategy, connect with a J.P. Morgan advisor today.