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Inflation Looms, US Annual CPI at 23 Month High

Posted by Joseph Trevisani on Oct 18, 2016 4:54:21 PM

American consumer prices climbed by the most in five months as the costs of energy and prescription drugs pushed headline inflation near the Federal Reserve’s goal.

The cost of living surged 0.3 percent in September, as predicted by analysts, for the largest monthly gain since April and followed a 0.2 percent rise in August, according to the Labor Department on Tuesday.  

Energy prices jumped 2.9 percent led by a 5.9 percent increase in the price of unleaded regular gasoline.  Energy services, gas and electricity, were 0.7 percent dearer. Prices for prescription drugs jumped 0.8 percent which trailed a 1.7 percent increase in August.

On the year the headline consumer price index (CPI) vaulted to 1.5 percent in September from 1.1 percent the prior month. It was the largest month on month gain since March 2014 and the highest annual rate since that October 

The core consumer price index, that is excluding food and energy items, increased 0.1 percent in September, half the forecast and followed August’s 0.3 percent swing. Over the previous twelve months prices were 2.2 percent higher in September, down from August's 2.3 percent pace and as expected by economists. The core CPI index has been at or above 2 percent for 11 months, since November 2015.  

Food prices were flat on the month as in August, while the cost of shelter rose 0.4 percent. The price of a new car dropped 0.1 percent with used vehicles prices falling 0.3 percent.

The Federal Reserve has long predicted that annual inflation would return to its 2 percent target.  Although the Fed's preferred price gauge, the core personal consumption price index was just under target in August at 1.7 percent and has not been at 2 percent since April 2012, it has been slowly edging higher since touching 1.3 percent in July 2015.  

The central bank has been giving strong hints in the past two months that it wants to increase rates soon, with analysts targeting the December 14th meeting as most likely. The intervening November 2nd meeting is just 6 days before the US presidential election.

The vote at the September 21st FOMC meeting was 7 to 3 in favor of keeping the Fed Funds rate at 0.50 percent. Three dissenting members all who supported a 0.25 percent hike, is an unusually high number for a Fed policy meeting.  

Rising consumer prices would support the argument that a rate increase is needed to head off even stronger price pressures in the future.  But until recently inflation has been largely absent from the economy.

The CPI is the most inclusive of several price indexes from the Labor Department as it tracks all goods and services.

The producer price index (PPI) released earlier this month which charts prices at the wholesale level reported a 0.3 percent gain in September, the first rise in three months. Core prices added 0.2 percent. On the year PPI was 0.7 percent ahead and core PPI was 1.2 percent higher indicating that there are few price pressures higher up in the product chain. The cost of imported goods rose 0.1 percent in September, another sign that inflation overseas remains minimal.

About 60 percent of the CPI covers prices in the service sector. Overall services inflation excluding energy was 0.2 percent in September after a 0.3 percent rise in August.  Annual services inflation was 3.2 percent, almost double the core rate on the product side.

Real weekly wages for private nonfarm workers rose 0.8 percent in the year to September, double the August rate but down from June's 1.3 percent pace. Post-recession gains in weekly wages reached their peak at 3.0 percent in January 2015. In 2015 real weekly wages rose 2.3 percent. This year the rate of increase has dropped by more than half to 1.0 percent.  

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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