Finally! We got inflation data.

CPI Report Confirms Likely Fed Rate Cut 

September’s Consumer Price Index (CPI) inflation report came out on Friday and solidified the likelihood of a Federal Reserve (Fed) rate cut next week. The CPI was originally due earlier this month, but the Bureau of Labor Statistics (BLS) is shut down, along with the rest of the Federal Government. They pulled some of their team off furlough and brought them back just for this CPI report, as it is required by law to calculate the annual Cost of Living Adjustment (COLA) for Social Security benefits.   

Headline CPI Slightly Below Expectations 

Headline CPI inflation rose 0.3% for the month, one tenth less than expectations. Yearly inflation rose from 2.9% to 3%, but the markets were expecting it to rise to 3.1%. Gasoline prices rose 4.1%, which was the main driver in the headline increase. Keep in mind, this is from September, so the current sub-$3/gallon prices we see today will be factored into next month’s report. 

Core CPI Continues to Ease 

Core CPI, stripping out volatile food and energy prices, increased 0.2%, also one tenth under expectations. Yearly core inflation declined from 3.1% to 3.0%. This caused the stock market to hit All-time highs. Remember, Shelter costs account for 44% of Core CPI. Owner’s Equivalent Rent (OER) makes up 33% of Core and is the most important component, rose 0.1%, one of the lowest figures in recent reports. OER is where the BLS asks homeowners how much they THINK they could rent their home for, unfurnished, and without utilities. As this figure declines towards the reality that we have seen in other actual rental data reports, Core CPI will continue to decline.   

Zillow Rent Data Signals Cooling Shelter Costs 

Speaking of rental reports, Zillow reported that blended rents, including new and renewal, sell 0.1% in September and were up 2.3% from 2.4% in August. There are record numbers of units and record-high concessions being offered to entice tenants to move in. This is additional confirmation that OER is likely overstated and should trend lower. 

Markets Expect a Fed Rate Cut Next Week 

The next Federal Reserve FOMC meeting is next week. Markets are pricing in a 100% chance of another rate cut at this meeting. They are also expecting an 80% chance in December. Remember, the Federal Funds rate is the rate banks charge each other for overnight lending. It is the extreme short end of the yield curve. Changes to this rate don’t directly impact 30-year mortgage rates. It will be important to hear what Chairman Powell says at the press conference after the meeting. That will likely help determine the direction of mortgage rates. 

Looking Ahead: Upcoming Economic Reports 

Tuesday, October 28: Case-Shiller Home Price Index 

Wednesday, October 29: Pending Home Sales, Fed meeting, and press conference