Implications: While consumer price inflation matched consensus expectations in September, it's important to realize that there was no pull back in price pressure given the two hot inflation readings in July and August. Consumer prices are now up 3.9% versus a year ago and up at a 4.8% annual rate in the past three months. "Cash" inflation, which excludes the government's estimate of what homeowners would pay themselves in rent, is up 4.6% in the past year. In our opinion, this is a more accurate measure of the inflation actually being felt by consumers. Energy prices have been a driving force behind recent overall consumer price inflation, and the Federal Reserve has openly said it focuses more on "core" prices, which exclude food and energy. Yet core prices show a similar acceleration trend. Core prices are up 2.0% in the past year and an even faster 2.5% in the past six months. This is at the upper end of the Fed's so-called target range, yet we don't expect the Fed to change its accomodative monetary policy stance anytime soon. In fact, given recent comments from regional Fed presidents, the Fed will likely continue to focus on the employment side of its dual-mandate. We think this is a mistake. If the Fed clings to easy monetary policy as it has publicy said it will, inflation will not be a short run, temporary problem. It will turn into a serious, long-term economic threat.
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