CPI declines as energy drag continues, but core inflation strength returns

CPI declined for the second month running in September. Energy prices were the only drag on headline CPI, while core and food prices made positive contributions. Headline CPI fell 0.2% m/m in seasonally adjusted terms (Barclays/consensus -0.2%). Core CPI was slightly stronger than expected at +0.2% m/m (Barclays/consensus: +0.1%). The NSA CPI index came in at 237.945, higher than our (237.8) and consensus (237.799) expectations. Energy prices declined 4.7% m/m, while food prices rose 0.4% m/m. On a y/y basis, total CPI was flat and core CPI rose 1.9%.

Core services prices returned to their trend of recent month, rising a solid 0.3% m/m. Shelter, including rent and OER, supported the strength in core services. Other categories such as medical care and transportation services increased as well, suggesting the strength in core services inflation was broadly based. Core goods prices were flat on the month, against the expectations of a small decline. Major categories such as apparel, new and used vehicles, medical commodities and tobacco all made negative contributions to core goods inflation. Offsetting these were rises in the prices of household furnishings, other household equipment, and education.

"We see the former group of goods as being more influenced by imported price pressures, and their continued decline during September suggests that falling import prices and dollar strength continue to be passed through to consumer goods", says Barclays.

After a weak core services reading in August, this month economists see a return to the long-standing dynamics for US inflation. Core services, which have typically been the main engine of inflation, remained strong and more than offset the softness in core goods. Following the decline in wholesale energy prices in recent months, gasoline and other energy prices were a drag on headline CPI.

"However, we expect their effect to be transitory and headline CPI to start increasing on a m/m basis at the end of this year. We maintain our view that the underlying trend in consumer prices remains benign, especially for services inflation , although we do not expect a strong upward trend to emerge in the near term. In particular, we expect core goods prices to remain a drag, driven by the renewed decline in commodity prices and the recent surge in the value of the dollar", added Barclays.