Following two months of hotter than expected prints (driven by surging energy prices and healthcare methodology changes), the October CPI print was expected to slow materially from the previous month (from 3.7% to 3.3% on headline) even if core was expected to remain unchanged at 4.1%. What we got, however, was a whopper, with CPI missing across the board with both headline and core prints coming in below expectations on both a sequential and annual basis.

Starting with the headline CPI, it came in at 3.2%, below the 3.3% expected, while MoM CPI also missed expectations, printing unchanged (0.0%), below the consensus of a 0.1% print, and sharply below last month’s 0.4% print.

A similar picture emerged on core CPI, where the October MoM print was 0.2%, below the 0.3% consensus estimate and down from the 0.3% increase in Sept, while YoY managed to drop from 4.1% to 4.0% missing expectations of an unchanged print, and the lowest since Sept 2021!

According to the BLS, the index for shelter continued to rise in October (more below) offsetting a decline in the gasoline index and resulting in the seasonally adjusted index being unchanged over the month. The energy index fell 2.5 percent over the month as a 5.0-percent decline in the gasoline index more than offset increases in other energy component indexes. The food index increased 0.3 percent in October, after rising 0.2 percent in September. The index for food at home increased 0.3 percent over the month while the index for food away from home rose 0.4 percent.

As noted above, the core CPI index rose 0.2% in October, after rising 0.3% in September, with the increase driven by rent, owners’ equivalent rent, motor vehicle insurance, medical care, recreation, and personal care. The indexes for lodging away from home, used cars and trucks, communication, and airline fares were among those that decreased over the month.

Looking at the contributions to annual CPI it’s clear that core goods inflation has all but disappeared (energy helped drag headline CPI lower in October), with the only sticky inflation left rooted deeply in services (primarily housing).

On a sequential basis, we also find that core goods inflation has been negative for the past 5 months, with energy helping drag down the headline print to unchanged (energy detracted 0.176% from the bottom line number).

The shelter index increased 0.3% in October, after rising 0.6% the previous month. The index for rent rose 0.5% in October, and the index for owners’ equivalent rent increased 0.4% over the month. The lodging away from home index decreased 2.5% in October The shelter index was the largest factor in the monthly increase in the index for all items less food and energy.

Of the above, lodging away from home was perhaps the most notable one: it was a key driver of inflation in Sep, today it mean-reverted and was a big catalyst for the core CPI miss.

Among the other indexes that rose in October was the index for motor vehicle insurance, which increased 1.9 percent after rising 1.3 percent the preceding month. The indexes for recreation, personal care, and apparel also increased in October.

The medical care index rose 0.3 percent in October, after rising 0.2 percent in September. The index for hospital services increased 1.1 percent over the month, and the index for prescription drugs rose 0.8 percent. In contrast, the physicians’ services index fell 1.0 percent in October. The index for used cars and trucks fell 0.8 percent in October, after decreasing 2.5 percent in September. The communication index fell 0.3 percent over the month, and the index for airline fares declined 0.9 percent. The index for household furnishings and operations and the index for new vehicles both declined 0.1 percent over the month.

Taking a closer look at housing prices we find that the shelter index increased 6.7% over the last year, accounting for over 70% of the total increase in the all items less food and energy index.

Bear in mind that while CPI very stale data is rising over 7%,  real-time rent indicators are in freefall as the latest Apartment List data shows.

Other indexes with notable increases over the last year include motor vehicle insurance (+19.2 percent), recreation (+3.2 percent), personal care (+6.0 percent), and household furnishings and operations (+1.7 percent).

So what does this drop in inflation mean for US Consumers? Well, it means that in real terms average hourly earnings were… unchanged in October as YoY inflation effectively destroyed all wage gains over the past year.

Finally, we bring your attention to a chart we posted one year ago, showing the correlation between M2 and CPI, when we predicted that CPI was about to collapse.

If you believe – like Friedman did – that the Fed/M2 is behind inflation, then boy do we have news for you. pic.twitter.com/hNA2jqgR1t

— zerohedge (@zerohedge) December 5, 2022

One year later we were right, and there is much, much more to go.