Core Inflation Takes A Breather

Posted on September 13, 2018 by Gemmer Asset

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This morning the Bureau of Labor Statistics (BLS) released CPI inflation data. It showed that Core Inflation (ex-food and energy) grew +2.2% year-over-year. This is down from the +2.4% economists expected and is the first time since 2017 that a Core CPI data point was lower than the previous month.



At risk of getting too deep into the weeds, I’ll only mention that today’s number appears to be the result of one particular sector. The larger question is whether or not this is blip or the beginning of a trend. Here is Bloomberg’s take:


“While the moderation partly reflects a near-record 1.6 percent monthly drop in apparel prices, a component that tends to be volatile, the broader slowdown follows a surprise decline in producer prices and suggests the path of inflation could be softer than some people expect.”


Obviously, today’s number alone doesn’t make a trend, but it’s worth considering what data points like this mean for the Fed’s thinking. Carl Ricardonna, Bloomberg’s Chief US Economist put it well:


“This certainly will not impact the Fed’s rate decision later this month, but it could lead policy makers to avoid signaling a clear runway for December.”


So, there will still very likely be a hike in December (current odds are about 75%). A continuation of inflation data like today’s may just mean the path for 2019 rates becomes more uncertain.


Labor Market Remains Very Strong


Also released today were two labor market related data points: initial (or new) jobless claims and continuing claims – both of which measure people claiming unemployment benefits. Both numbers are the lowest they’ve been in nearly 50 years.



We summarized last week’s Jobs report here, highlighting both the better than expected payrolls number and the strong wage growth data.


Dual Mandate


The Fed’s mandate is twofold: 1) full employment and 2) stable prices. Full employment doesn’t mean everyone has a job. It means that employment is at a level that doesn’t cause excess inflation. Most economists agree that we’re either at or below that level. What’s likely driving the Fed’s current policy strategy is what’s going to happen with inflation. They simply don’t want to be in a position where they have to play catch up in the form of raising rates too quickly in order to stem the effects of runaway inflation.


Certainly, today’s inflation numbers aren’t at running away. But the tight labor market and recent wage growth numbers are likely top of mind for Chairman Powell when he considers the fact that one of his biggest responsibilities is ensuring stable future prices.





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