October U.S. CPI Adds Pressure to Fed Policymaking

Another firmer-than-expected U.S. CPI (Consumer Price Index) inflation report for October 2021 strongly suggests that U.S. Federal Reserve officials will pull forward their expected timetable for raising the policy rate in an effort to manage the risk that long-term inflation expectations accelerate as a result of inflationary pressures and the resulting economic uncertainty. The Fed will release updated rate hike forecasts in December; following this latest CPI report, we believe the updated median Fed forecast could indicate two rate hikes in 2022 and three to four hikes in 2023.

The October CPI report showed prices across a wide range of retail goods rose more than expected as consumers pulled forward their holiday purchases, and the acceleration in shelter categories over the last two months was also firmer than expected. Continuing supply chain pressures and demand for automobiles also contributed to higher reported inflation.

CPI report breakdown

U.S. core CPI increased 0.6% month-over-month (m/m) in October, outpacing consensus estimates. Notably, the categories for rents and owners’ equivalent rents (OER) increased 0.4% m/m, a similar pace as September, but October’s acceleration was more broad-based across regions and population densities (rural and urban). Overall, a stronger economy, higher interest rates, higher home prices, and lower unemployment are all contributing to shelter price inflation’s recovery from recession-induced weakness. The October report suggests rental price inflation could accelerate above the pace that was prevailing prior to the recession faster than anticipated.

Elsewhere in the October CPI data, the retail goods category increased at a strong pace of 0.7% m/m, a report consistent with other high frequency economic indicators. It appears that media reports warning of empty shelves during the holiday shopping season have influenced consumer shopping patterns. This strong demand alongside already low retail inventories boosted prices for items like furniture (+0.8% m/m) and recreational goods (+0.4% m/m) in particular.