The inflation report just wasn’t very dramatic. Cue a range of wildly varying takes on Wall Street

The latest inflation report just came in slightly above Wall Street’s consensus forecast, stoking debate among experts about the potential for more persistent consumer price increases than expected. As measured by the consumer price index, inflation rose 0.4% in September and 3.7% from a year ago, the Bureau of Labor Statistics reported Thursday. That’s compared to a consensus Street estimate for an increase of 0.3% and 3.6%, respectively. 

Over the past 18 months, as the Federal Reserve battled inflation with interest rate hikes, economists have routinely warned that one of the key threats to the U.S. is “sticky” price increases. Inflation acts like a weight on the back of consumers and businesses; and when it persists for too long (or “sticks”), it can force Fed officials to raise interest rates to a point where a job-killing recession becomes unavoidable. Citi’s chief U.S. economist Andrew Hollenhorst, who believes a recession will hit the U.S. in the first half of 2024, explained in a Thursday note that he fears September’s inflation report was evidence of this type of sticky inflation.

“Today’s inflation report is likely raising concern for Fed officials that signaled strongly earlier this week they may be finished raising rates. Rather than returning to 2% we have instead new evidence that inflation is stuck closer to 4%,” the Wall Street veteran wrote, warning that shelter inflation may be here to stay because rising mortgage rates haven’t slashed home prices as anticipated.

Bank of America economists, led by U.S. economist Stephen Juneau, also argued Thursday that the latest CPI report is a concern for the Fed as it seeks to tame inflation without sparking a recession. They pointed to key areas that could be indicative of the need for further rate hikes, including the 1.5% increase in energy prices during September and “sticky” core services inflation—a category that includes a mix of components like tuition prices and shelter, transportation, and medical services costs.

“In short, the report reminded us that the path to 2% inflation is unlikely to be smooth sailing and the Fed must continue to err on the side of doing too much rather than too little,” the Bank of America economists wrote.

Of course, as is typically the case in this era of economic confusion, when sudden wars, pandemics, and technological advancements can throw off even the best of prognosticators, the most important takeaway from the latest inflation report really depends on who you ask.

Some experts noted that core inflation, which excludes more volatile food and energy prices and is more closely watched by the Fed, matched Wall Street’s expectations in September, rising just 0.3% during the month and 4.1% from a year ago.

Rick Rieder, a Wall Street heavyweight who currently serves as BlackRock’s CIO of Global Fixed Income and head of the BlackRock Global Allocation Investment Team, explained that many market watchers have been particularly focused on the often volatile—and lately negative—monthly movements of the consumer price index, but he’s more focused on the positive long-term trend.

“All of this excitement belies the fact that (broadly speaking) inflation has been making a seemingly durable downward trend, while at the same time the labor market has remained remarkably resilient,” he said Thursday. “[W]e think the Fed is likely on hold for the time being, as it awaits more data, with the possibility of a final rate hike at year end.”

Some more bullish economists also pointed out that shelter costs accounted for half of inflation’s rise in September, despite the housing market struggling under the weight of the Fed’s rate hikes. The index for shelter prices, which makes up roughly one-third of the total CPI, rose 0.6% last month and 7.2% from a year ago. 

Ed Yardeni, founder of the sell-side consulting firm Yardeni Research and another Wall Street legend, noted Thursday that if you exclude shelter costs from September’s inflation data, both the headline and core figures rose just 2% on a 12-month basis, matching the Fed’s target. 

But why exclude shelter prices from the inflation calculation? Some argue that because home prices have risen less than 1% since June 2022, according to the Case-Shiller U.S. National Home Price Index, it makes sense to discount the shelter category slightly when measuring consumer price increases. However, rent prices in U.S. cities have jumped more than 7% since last September, according to Fed data, which has left some experts concerned that we could still see a consistent rise in overall shelter prices. 

Yardeni lands in the bulls’ camp in this shelter argument—and when it comes to the debate over the path ahead for inflation.

“Wage inflation is more persistent, but moderating. Rent inflation is stickier, but also moderating. Today’s CPI report for September mostly confirms our assessment.” he wrote in a Thursday note. “Price inflation is turning out to be transitory after all.”

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