While the September Consumer Price Inflation report was in line with expectations, with the headline CPI declining -0.2% in the month - the biggest monthly drop since January - and unchanged from a year ago, just as consensus predicted, it was all about the core CPI where attention was focused.
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On the headline print, the drop was once again due to tumbling energy prices, which declined 4.7% in September, and especially gasoline which tumbled -9.0% according to the BLS: "The gasoline index continued to fall sharply and was again the main cause of the seasonally adjusted all items decrease. The indexes for fuel oil, electricity, and natural gas declined as well."
Other contributors included Energy Services, which dipped -0.4% led by a -0.5% drop in Electricity costs and a -0.3% decline in Utility gas service.
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All of this was expected.
Where the market was surprised, however, was in the Core CPI print (excluding food and energy), which rose 0.2% for the month, above the 0.1% expected, and is now up 1.9% Y/Y, the highest rate of annual increase in over a year.
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What prompted the increase? Pretty much all of the most important essentials: "The indexes for shelter, medical care, household furnishings and operations, and personal care all increased." Some core items did decline, such as apparel, used cars and trucks, new vehicles, and airline fares however one particular item caught everyone's attention - shelter.
From the release:
The index for all items less food and energy increased 0.2 percent in September after rising 0.1 percent in July and August. The shelter index increased 0.3 percent in September after rising 0.2 percent the prior month. The rent index increased 0.4 percent and the index for owners' equivalent rent increased 0.3 percent. The index for lodging away from home increased 0.8 percent in September after declining in August. The medical care index rose 0.2 percent in September with the indexes for physicians' services and hospital services rising but the index for prescription drugs declining slightly. The index for household furnishings and operations increased 0.3 percent after declining in each of the four previous months. The index for personal care rose 0.3 percent, and the alcoholic beverages index rose 0.1 percent. In contrast, the apparel index fell 0.3 percent after rising in July and August. The index for used cars and trucks fell 0.2 percent, while the new vehicles index declined 0.1 percent, as did the tobacco index. The index for airline fares also declined 0.1 percent in September after declining more sharply in July and August. The recreation index was unchanged in September.
The index for all items less food and energy has risen 1.9 percent over the past 12 months; this is a slight increase from the 1.8 percent rise for the 12 months ending August and is the highest 12-month change since July 2014. The shelter index has increased 3.2 percent over the past 12 months with the rent index up 3.7 percent; these figures have been gradually trending upward
And here is the moment when the BLS finally admits there is a surging rent problem: up 3.7% Y/Y, average rents are rising not only double the pace of core inflation, but at the highest pace since late 2007, when the US consumer was in a far stronger condition to withstand such price increases.
Of course, we already knew this:
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As to why this is a concern:
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Which is why the market reacted the way it did, and pushed the USD promptly higher in a kneejerk reaction - because while the Fed is boxed in all other fronts, if Yellen is indeed worried about that most important concern to all Americans, namely affording the roof over their heads, then now is clearly the time to hike rates and prick the rental bubble before it gets so big, the primetime news are flooded with coverage of Americans sleeping under bridges because they can no longer afford rent (forget mortgage).
