Summary    Core CPI inflation surprised modestly to the upside in October, rising 0.225%in month-on-month terms. This raised the year-over-year rate to 1.8%. The dataprovide additional evidence that the core inflation trend is firming after a stringof very weak prints earlier this year. The three-month annualized change in coreCPI inflation is now at 2.4%, the strongest since February 2017. Today's datawill not resolve the inflation debate among Fed officials, nor will it persuade Feddoves. But the data should help to alleviate the inflation worries of some centristand hawkish-leaning Fed officials who had grown uneasy with the Fed's inflationnormalization narrative earlier this year.    Within the details, there is tentative evidence that core goods inflation isstarting to firm, after meaningfully underperforming both our models based onmacroeconomic fundamentals (e.g., the dollar, PPI core goods prices, importprices) and leading indicators at the component level (e.g., PPI apparel prices andprivate sector measures of used car prices). However, the year-over-year inflationrate for core goods inflation still remains near the lowest level since 2004andwell below leading indicators. Core services inflation, on the other hand, wassomewhat stronger than expected, and the outperformance was broad-basedacross the subcomponents. The report also appeared to be free of distortionsfrom meaningful outliers, other than the jump in tobacco prices.    Looking ahead, our core inflation forecast has increased modestly in the neartermbut is otherwise broadly unchanged. Core CPI inflation is still expected toremain near recent low levels in year-over-year terms through 2017. But we expectthe monthly inflation rate to show a somewhat firmer trend of about 0.18% onaverage over the coming months. A continuation of this trend is supportive of aDecember rate hike and a gradual pace of rate increases in 2018.    Beyond, today's data give us somewhat more confidence in our view that coreinflation should rise over the medium term. We have been generally conservativein our forecasts for a number of components, particularly on the core goodsside, relative to leading indicators. But there is now tentative evidence that somecomponents are either rising toward leading indicators (e.g., used cars) or areremaining resilient in line with macro fundamentals (e.g., owners' equivalentrent). We continue to see core inflation approaching the Fed's objective byend-2018.

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