The Bureau of Labor Statistics (BLS) reported on October 14 that US consumer prices rose 3.7% in the 12 months to September. Much of that rise came from gasoline. The gasoline index, a measure of pump prices, rose 9.1% in September and 34.2% over the year.
Traders paid as much attention to a second number in the same report. Core inflation, which leaves out food and energy, rose 0.3% in the month. Economists polled by Reuters had expected 0.2%. After that small miss, traders changed their bets on the next move by the Federal Reserve, the US central bank.
Two numbers from one report
The BLS builds the Consumer Price Index, or CPI, from the prices of a basket of goods and services that households buy. The basket holds rent, groceries, gasoline, haircuts, car insurance and much more. Economists call the broadest version headline inflation. It counts the whole basket.
Core inflation uses the same basket minus food and energy. Economists remove those two because their prices swing more from month to month. A storm, a war or a refinery outage can move gasoline prices within a week. Economists use core to see the slower trend beneath those swings.
The two measures came out far apart in September. Headline prices rose 0.6% in the month and 3.7% over the year. Core prices rose 0.3% in the month and 2.6% over the year.
Gasoline made up most of the rise
Energy costs account for the gap between the two. The energy index rose 5.2% in September and 20.4% over 12 months. Gasoline, the biggest energy cost for most households, rose 34.2% over the year.
The BLS said gasoline accounted for over half of the monthly increase in all prices. That is a large share for a single item. Drivers felt it at the pump each week.
Bar chart: over the 12 months to September, gasoline prices rose 34.2%, energy 20.4%, shelter 3.2% and food 2.5%
Prices in other big categories rose less. Shelter, the category for rent and the cost of owning a home, rose 3.2% over the year. Food rose 2.5%. Both sit near the core figure. Readers can see from that gap how much of the headline number came from fuel.
Oil prices stayed high around the report. Brent crude is the reference price for oil traded around the world. It ended trading on October 14 at $106.06 a barrel. WTI crude, the main US oil price, ended the day at $95.17.
Both numbers came in above forecasts
Economists publish forecasts before each CPI report. Traders buy and sell in advance based on those forecasts, so prices reflect them before the report comes out. Traders react to the surprise, meaning the gap between the forecast and the result.
Headline inflation came in at 3.7% for the year, against a forecast of 3.6%. In August it had been 3.4%. Core came in at 2.6% for the year, against a forecast of 2.5%. In August it had been 2.4%.
Traders paid the most attention to the monthly core reading. Core rose 0.3% in September, the same pace as in August. Forecasters had expected it to slow to 0.2%.
A small miss in core carries weight. Core leaves out fuel. A hot core reading, one above forecast, is a sign that higher prices are spreading beyond the gas tank. Those areas can include services, rents and goods whose makers pass on higher shipping costs.
Fuel prices can fall as fast as they rose. Higher prices for services and higher wages tend to last longer. For that reason, central banks such as the Fed watch core.
The Fed odds jumped
The Federal Reserve sets a short-term interest rate called the federal funds rate. Banks charge each other this rate on overnight loans. Lenders factor it into what people pay on credit cards, car loans and business loans.
The Fed's target range for this rate sits at 3.75% to 4%. The Fed raised the range by 25 basis points in September. A basis point is one hundredth of a percentage point, so 100 basis points make one percentage point. That increase, or hike, was the Fed's first in three years.
Traders bet on the Fed's next move through futures, contracts that pay out based on where rates end up. CME Group turns those futures prices into odds with its FedWatch Tool. Before the CPI report, FedWatch odds of a hike at the October 27-28 meeting stood at about 22%. After the report, the odds rose to about 52%.
Stat: FedWatch odds of a Fed rate hike at the October 27-28 meeting rose to about 52% after the CPI report
Fed officials prefer a different inflation gauge, called core PCE, and they can read the same signal in it. Core PCE is a price index built from what consumers spend, with food and energy left out. Core PCE rose 3.0% in the year to August. It covers a wider range of spending than CPI, including costs that employers and governments pay for households.
Markets on October 14
Stocks fell on the day of the report. The S&P 500, an index of 500 large US companies, closed down 1.11% at 7,718.94. The Nasdaq Composite, an index that leans toward tech companies, dropped 1.88%. Investors also marked tech shares down on several company stories that day. Inflation was one force among several.
The VIX is an index of how much traders expect stock prices to swing over the next month. It rose 10.48% to 16.87. A higher reading means traders are paying more for protection against price swings.
Bond yields fell on the day but stayed up for the month. A bond is a loan to a government or company that pays interest, and its yield is that interest rate. The 10-year yield is the rate the US government pays to borrow for 10 years. It closed at 5.19% on October 14, 2.7 basis points lower on the day. Over the past month it has risen 22.9 basis points.
Investors set long-term yields through their buying and selling. They weigh many things at once, including growth worries and demand for safe assets. Safe assets are investments people buy when they want less risk.
The job of each number
Headline inflation sits closest to what you pay. It includes your gas bill and your grocery receipt. A 3.7% headline figure means the full basket costs 3.7% more than a year earlier. If your pay rose by less than that, your money buys less than it did.
Core is a measure of the trend beneath the fuel swings. It leaves out items whose prices can reverse in a month. A rising core reading means price increases have reached parts of the economy that move slower.
Fed officials lean on core when they set borrowing costs. A central bank can choose to look past a spike in gasoline. A rise in core prices is harder to look past. For that reason, traders moved their hike odds more on a 0.3% monthly core reading than on a 34.2% yearly jump in gasoline.
Borrowing costs are high. The Mortgage Bankers Association, a lender trade group, puts the average 30-year mortgage rate at 7.50%. That is the highest since November 2023. Over time, lenders set rates on mortgages, car loans and credit cards in line with Fed policy and Treasury yields. Treasury yields are the rates the US government pays on its bonds, such as the 10-year yield.
Dates on the calendar
September producer prices, retail sales and weekly jobless claims are due on October 15 at 8:30 a.m. ET. Producer prices measure what businesses receive for their goods. Retail sales measure spending at stores. Jobless claims count people who apply for unemployment benefits. Fed officials meet to set policy on October 27-28. The BLS will publish October CPI on November 10 at 8:30 a.m. ET.
Each inflation number serves a different purpose. Headline measures how fast your cost of living is rising. Core is the number the Fed weighs when it sets the price of borrowing. A reader with stocks, bonds or a variable-rate loan feels both through different channels. A variable-rate loan is one whose interest rate moves with market rates.
Sources
Not investment advice.