Inflation

When the Fed held last month, we said the strongest case for a second hike was goods — and that this morning’s inflation report is the first test.

One thing first: there’s no annual rate this month. Last fall’s government shutdown left no October prices to compare against. So we read the pace.

Prices rose four tenths. Core rose three tenths, a third straight month — a three point seven percent pace over three months, up from three point four.

Energy stepped back. In September, gasoline alone was over half the rise. In October, all of energy was about a seventh. At the pump, gas actually dipped; it rose only after seasonal adjustment. Over the year, it’s still up thirty-seven percent.

Airfares, last month’s one leak, rose less than half a percent.

Now the test. Goods outside food and energy rose two tenths — a fourth straight rise, about a two percent pace. Before twenty twenty-five, they were flat to falling.

This report can’t name causes. So we looked for tariffs another way: import-heavy goods, their yearly pace before twenty twenty-five against the pace since.

Toys were falling three percent a year; since, rising five and a half. Shoes and clothing: flat before, over four since. Furniture and appliances turned too, then gave some back this past year.

Not every import turned. Phones still get cheaper, nine percent a year. New cars: up under one percent. Computers rose fastest, and this report can’t separate tariffs from anything else. The pattern fits tariffs. It doesn’t prove them.

And goods didn’t carry core. Services did — a four percent pace over three months, with shelter over thirty percent of October’s increase.

The two-year Treasury rose seventeen basis points today, the most in a day since April twenty twenty-five, to four seventy-three — above where it sat before September’s hike. Last Thursday we said it was backing away from a second. The five-year inflation gauge didn’t move.

So: goods passed the test. Against a second hike, energy stepped back, expectations held, and jobs aren’t pushing. For it, two-thirds of October’s rise was core. On this report, the case got broader than goods.

This is the last of these reports before the Fed decides, December ninth. Watch services.

The most important number in this morning’s producer report isn’t the big one. It’s what gas stations keep on a gallon. In September it fell by a quarter.

Producer prices jumped one point three percent — the Bureau calls it the largest monthly rise since March twenty twenty-two. The annual rate went to six point three. Energy alone rose almost eleven percent in the month.

Now the gallon. Wholesale gasoline rose twenty percent in September. At the pump, yesterday’s consumer report had it up nine. Last month we called the gap the last step absorbing a cost. Fuel retailing margins fell eleven percent in August. In September, twenty-five — more than twice as much.

That’s a cushion, not a fix. A margin can only shrink so far, and this report doesn’t show the floor.

Now the slower shock. Steel mill products: up twenty-eight percent over the year, and two percent in September alone. Electronic components, twenty-seven. Nonferrous metals, thirty-four. All three were running hot in February, before oil turned.

That’s where a tariff would show first: when imported metal costs more, domestic producers can charge more too. Tariffs are one possible reason — this report can’t separate them out.

Like fuel, it isn’t arriving whole. Inputs to the last stage of production, food and energy excluded: eight point two percent. Finished goods with the same exclusions: three point nine — where they’ve sat all year.

Two corrections. August was revised up: the headline to five point six, core to four point eight. And last month we said those inputs had climbed every month since April. September broke the streak — eight point four to eight point two.

Meanwhile the last step firmed. Core producer prices rose to five percent. And outside fuel, trade margins rose one point four — some sellers are widening theirs.

The bond market looked past the headline. On a morning with three reports — this one, retail sales and jobless claims — the two-year Treasury fell five basis points. It still sits seventy-seven above the Fed’s ceiling.

So here’s the picture. Energy is the shock everyone sees, and the gas station is eating it. Metals are the quieter one, and the middle of the chain is eating that. The question for October twenty-eighth is how long the middle holds.

This month the Fed upgraded one word about the economy: solid became strong. Consumers are most of that economy. So — is the consumer strong?

In dollars, yes. Spending rose half a percent in September.

Now take prices out. They also rose half a percent. So the volume — what people actually bought — barely moved. Goods fell. Services edged up.

Our retail sales read found most of September’s new dollars went to the gas pump. Across all spending, gasoline and other fuels took forty percent — and people bought slightly less of them. Outside food and energy, volume was flat too.

To be fair to strong: the same morning, GDP showed consumer spending growing near four percent over the summer quarter. Strong fits the summer. September is where it paused.

So what paid for it? Income after taxes rose two tenths. Prices, five. Real income fell three tenths — the weakest month since April. Over the year, real income is up one percent. Real spending, two and a half.

The gap comes out of savings. The saving rate fell to three point eight — from five point six in January, and the lowest since October twenty twenty-two.

The last time saving ran this low, in twenty twenty-two, spending didn’t crack. Inflation cooled, real incomes recovered, and the cushion refilled. That’s the counterexample — and the condition. This September, prices sped up and real income fell.

Prices matter to the Fed on their own. Last month we said watch core’s three-month pace — it was running near two. Now: two point nine.

The bond market got GDP and this report together. By the close, the two-year yield, the one that tracks the Fed’s path, was six basis points lower. On the day, it didn’t price a firmer Fed.

So — strong? Over the summer, consumers spent like it. In September, they held their volume by saving less while real income fell. That’s not strength. That’s a consumer hanging in. If the case for a second hike rests on demand, the funding under it is thin. If it rests on prices, core is back near three.

The number to watch is real income. October’s report lands November twenty-fifth. The Fed decides December ninth.