Implications: Consumer prices increased a modest 0.1% in September as the Fed looks to stay on track to finish quantitative easing at the end of next week. Consumer prices are up only 1.7% in the past year and one of the key reasons is America's booming energy production and, as a result, lower world oil prices. Energy prices declined for a third consecutive month in September and are down 0.6% from a year ago. Given the sharp drop in oil prices in the first half of October, look for more of the same in next month's report. However, there are sectors where inflation is higher. Food and beverage prices are up at a 3.7% annual rate in the past three months and up 2.9% in the past year. So if you only use the supermarket to gauge inflation, we can understand thinking the headline reports are too low, that "true" inflation is higher. In addition, housing costs are going up. Owners' equivalent rent, which makes up about ΒΌ of the overall CPI, rose 0.2% in September, is up 2.7% in the past year, and will be a key source of any acceleration in inflation in the year ahead. The worst news in today's report was that "real" (inflation-adjusted) average hourly earnings declined 0.2% in September. But these earnings are still up 0.3% from a year ago and workers are also adding to their purchasing power because of more jobs and more hours worked. Plugging today's CPI data into our models suggests the Fed's preferred measure of inflation, the PCE deflator, probably rose 0.1% in September. If so, it would be up 1.5% from a year ago, still below the Fed's target of 2%. We expect this measure to eventually hit and cross the 2% target, but given the bonanza from fracking and horizontal drilling, not until next year.
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Posted on Wednesday, October 22, 2014 @ 10:13 AM
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