Core CPI Rebounds on Used Car Bump, While Tariffs’ Impact Is Mixed

Core U.S. Consumer Price Index (CPI) inflation rebounded in October, though not as much as expected, driven largely by a bounce in used car prices. The year-over-year rate ticked down to 2.1%, and evidence of tariff-related price increases was mixed.

The October print is consistent with stable core inflation (which excludes energy and food prices), as a cyclical rise in productivity appears to be buffering the extent to which rising labor and non-labor input costs are being passed on to consumers. Looking at the CPI and recent Producer Price Index (PPI) figures, we estimate that core personal consumption expenditure (PCE) inflation – the Federal Reserve’s preferred measure – could dip to 1.8% year-over-year in October (from 2.0% in September). These data, along with the recent labor market report, reflect “Goldilocks” conditions (not too hot, not too cold) in the U.S. economy, where solid growth in labor market demand has been met with capacity improvement and still-manageable inflationary pressures. Overall, the data, coupled with our forecast for a moderation in real GDP growth over the next several quarters, support our current forecast for three Federal Reserve rate hikes between now and the end of 2019.

Mixed early results for tariffs

October’s bump in used car prices followed a methodological quirk in the used car series in September that resulted in the single largest monthly price drop (−3.0%) since 2003. October’s 2.6% advance for the category partly offset the loss, and drove much of the rebound in today’s inflation print.

Outside of used cars, core goods inflation was softer, however, and evidence was mixed that the recent Chinese import duty hikes are affecting consumer price inflation. Among the products listed by the United States Trade Representative (USTR) as eligible for the late-September 10% increase in customs duties, prices firmed for small appliances, furniture, and clocks and lamps but were soft for other items, including sports vehicles and bikes, pet products and personal care products.

We continue to expect a portion of the tariff hikes to be passed on to U.S. consumers. While policy measures in China to keep production costs low – including announced most favored nation (MFN) reductions, yuan depreciation and import substitution – will likely mute the price pressures somewhat, keep in mind that tariffs are scheduled to increase to the full 25% on 1 January 2019. And while media reports suggest that negotiations between the U.S. and China could avert the scheduled tariff increase, we are skeptical that a deal will be reached.