Inflation Low as Oil Prices Fall, Home Sales Best in a Year
- The September Consumer Price Index increased by 0.1 percent, boosted by food prices.
- The September Core CPI also gained 0.1 percent, and was up 1.7 percent over the previous 12 months.
- Existing Home Sales for September increased by 2.4 percent to a 5.17 million unit rate.
Inflation metrics are attracting attention lately as energy prices dip while the Federal Reserve contemplates interest rate lift-off. Headline CPI was up by 0.1 percent in September as energy prices continued to fall. The spot price for West Texas Intermediate crude oil has eased from a late June high of more than $107 per barrel, to a mid-October low of $81, a slide of nearly 25 percent. Over the last week, WTI has firmed to near $83 per barrel. Likewise, the national average price of a gallon of unleaded regular gasoline has dipped from $3.69 per gallon in late June to $3.15 per gallon in mid-October, giving up 15 percent. The rule of thumb is that every penny dip in gasoline prices puts an extra $1 billion in the hands of U.S. consumers over the course of a year. Some of those pennies will go to saving, some to paying down debt, but the bulk of it will go to purchasing more stuff, including more gasoline. Declines in energy prices through September brought the energy sub-index of the CPI down by 0.7 percent for the month. Further declines in gasoline prices through October will likely bring the energy sub-index down for the fourth consecutive month when the October CPI report comes out next month. Food prices were a counterbalance to falling energy prices in September. The food sub-index of the CPI was up by 0.3 percent for the month. Less food and energy, core-CPI was up by 0.1 percent in September, and was up 1.7 percent over the previous 12 months.
Falling energy prices complicate the Federal Reserve’s pivot away from extraordinary policy. We believe that the Fed will announce, as planned, the end of its asset purchase program at the upcoming October 28/29 FOMC meeting. There is a benefit to the Fed from being predictable and holding to its previously announced intentions. We also continue to believe that interest rate lift-off will come around June of 2015. Even though inflation is a little weaker than expected, due to lower energy prices, labor market metrics are tightening up. The U.S. unemployment rate is already below 6 percent, at 5.9 for September, and will fall further. Fifteen states are already at 5 percent unemployment or lower. The drop in energy prices, if durable, will also shift the regional balance of strength in the economy, marginally, toward energy consuming areas and away from energy producing areas. This will help labor market metrics in lagging regions.
Existing home sales for September increased by 2.4 percent to hit a 5.17 million unit annual rate, the best since September 2013. With job creation strong, consumer confidence rising and housing credit set to ease, conditions look positive for the housing sector at year end. The Federal Housing Finance Agency has announced plans that will allow Fannie Mae and Freddie Mac to relax underwriting standards, broadening the availability of mortgages.
Market Reaction: Equity markets are rebounding after their mid-October sell-off. Treasury yields are still low, but trending up. The 10-Year Treasury bond is yielding 2.24 percent. NYMEX crude oil is up to $83.26/barrel. Natural gas futures down to $3.85/mmbtu.
For a PDF version of this Comerica Economic Alert click here: CPI Oct 22 14.