Next Week's September CPI and the Fed

While corporate earnings -- likely stock market friendly -- will be the dominant market focus this week, the macro focus should remain on whether the Fed will hike rates in December.   The September FOMC Minutes, due Wednesday, will probably keep open the door for a rate hike, but may very well lean dovishly by emphasizing low inflation -- inasmuch as the Fed did not hike rates at that meeting.  A speech by the dovish Fed Governor Brainard on Thursday could underscore this tilt.  But, the September CPI, due Friday, is the key new information that could impact the odds of a December rate hike.  A consensus print would keep these odds high for now, although it would likely be neutral for the markets as a December rate hike already is highly anticipated.  Nevertheless, a consensus print will not be the last word on the risk of a December rate hike -- it may not translate into a speedup in the September Core PCE Deflator.  

Consensus expects the Total CPI to speed up to 0.6% m/m from 0.4% in August, as the run-up in oil prices filtered through to gasoline and other energy prices.  With oil prices having stabilized so far in October, this high print will be viewed as temporary.  And, as usual, the Core CPI (total less food and energy) will be the more important inflation measure.  Consensus expects a 0.2% m/m increase in the Core, the same gain as in August.  Such an increase is enough to lift the y/y to 1.8% from 1.7%.  But, the 0.2% m/m increase is likely to translate into a 0.1% m/m increase in the Core PCE Deflator, as it did in August.  (The slower Core PCE Deflator is primarily because of differences in weights between the PCE Deflator and CPI.)  In this case, the September Core PCE Deflator's y/y may stay at 1.3% -- remaining well below the Fed's 2% target.  If so, a dovish view of the Fed could return.  The September Core PCE is due October 30.

A consensus 0.2% m/m increase in the September Core CPI cannot be ruled out.  Declines could be seen in motor vehicle (given the strength of motor vehicle sales) and apparel prices (as warm weather could have delayed introduction of higher-priced autumn clothes), but hotel rates and owners' equivalent rent could remain robust and airline fares may rebound as fuel costs rose.

From a longer perspective, whether the Core CPI climbs to 2.0% next year, as the Fed expects, could depend on owners' equivalent rent staying at its trend 0.3% m/m.  Then, an end of the one-off price drops cited by the Fed would result in the Core CPI trending 0.2%+ m/m.   But, if owners' equivalent rent slows to 0.2% m/m and other components continue their low trends, then the Core CPI may not reach the Fed's target next year even if the recent price drops end.  So, from a longer perspective, the most important component of the CPI to watch is owners' equivalent rent.