The monthly rate of headline inflation increased +0.9% in October, led by rising energy prices. It was the fastest month-over-month acceleration in the Consumer Price Index (CPI) since June 2008. The percent change from a year ago moved up +6.2%. The last time CPI accelerated this quickly on a year-over-year basis was October 1990 at +6.3%.
Source: FRED.
Earlier this year, we wrote about our expectations for the pace of inflation through the second half of 2021. At that time, we looked at the components of energy, food, and shelter to identify potential drivers of an acceleration in inflation if one were to occur – the subsequent prints confirmed those expectations. Today, we will dive into the October CPI print through a similar lens and offer some additional information that may influence near-term price increases.
Shelter is the largest individual category of the CPI calculation, and the largest component of shelter is owners’ equivalent rent (OER). Food and energy prices are also significant components.
Source: BLS.
The shelter component of CPI is now back to pre-pandemic levels on a year-over-year percent change basis at +3.5%. It has accelerated each month since the February 2021 bottom.
Source: FRED.
Owners’ equivalent rent has been accelerating consistently since February 2021 as well. The latest data for OER was just north of +3.1%.
Source: FRED.
Food at home prices increased +0.96% month-over-month in October. On a year-over-year percentage change basis, the acceleration has been led by the animal protein and beverages categories.
Source: FRED.
Source: BLS.
Food away from home increased +0.83% month-over-month. This was largest month-over-month price acceleration for the category since February 1981.
Source: FRED.
We believe food prices could remain elevated in the near-term due to accelerating fertilizer costs, which accounts for roughly 40% of the input costs related to food production. As shown in the graph below, fertilizer costs have historically been closely related to energy prices.
Source: Hedgeye.
Earlier in this article, we noted that the October CPI print was led by price increases in energy. The month-over-month number came in at +4.7%, the second fastest pace during the pandemic era. Year-over-year energy prices jumped to +29.9%, a level not seen since July 2008.
Source: FRED.
Recently, oil (West Texas Intermediate) and natural gas prices have decelerated after several months of consistent increases. However, the supply dynamics still present an issue.
Source: Koyfin.
Source: Hedgeye.
Accelerating CPI data impacts future expectations for real economic growth. One method to track these expectations is by looking at TIPS breakeven inflation rates. At current levels, the bond market is pricing in inflation just north of 3% over the next 5 years and expecting inflation to move marginally lower after that period.
Source: NDR.
We will continue to monitor the underlying components of CPI as they have significant implications for the trajectory of the economy. The October CPI components and market data suggest that inflationary pressures are likely to persist through 2021 and potentially into the first few months of 2022.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC
