Overall inflation is posing no threat to the U.S. economy, with a new report showing retail prices fell in September, the biggest drop in eight months. However, a key measure inside this moved higher, leading to more guessing about whether the Fed will raise interest rates.
The U.S. Labor Department reports the Consumer Price Index posted a 0.2% drop from August and is unchanged from September 2014.
Prices for energy fell 4.7% in September, with all major component prices declining. Gasoline prices continued to fall sharply and were again the main cause of the overall decrease.
In contrast, food prices rose 0.4%, the largest increase since May 2014.
And when volatile food and energy prices are removed from the CPI, the core index rose 0.2% in September, the biggest rise in three months, while the annual rate moved up a notch to 1.9%.
This latest overall reading is well below the U.S. Federal Reserve’s 2% annual inflation target, which it says is needed before it can raise interest rates. However, policy makers recently have been divided on this approach, with some paying more attention to the core CPI.
“The annual increase in core inflation continues to inch closer to the Fed’s 2% objective relative to the 1.7% rate that prevailed at the start of the year,” said Paul Ferley, assistant chief economist at RBC Economics. “This upward trend, which is occurring despite a sharp appreciation of the U.S. dollar, does suggest evidence that growth remains sufficiently strong to continue to absorb slack in the economy.”
He believes this, coupled with a separate report on Thursday showing initial jobless claims fell to the lowest monthly average since 1973, is increasing evidence the Fed will hike interest rates before the year is out.
“Our forecast assumes such will get underway before the end of the year, with this rate being raised 25 basis points (0.25%). However, such a hike is contingent on indications of an easing in recent financial market volatility which contributed to the central bank leaving policy unchanged at the September Federal Open Market Committee,” he said.
On the flip side, a further decline in consumer prices continues to undermine the Fed’s outlook for rising inflation levels near-term, according to Stifel Fixed Income Chief Economist Lindsey Piegza.
“Excluding rising housing costs, the CPI is firmly negative, reinforcing the need for the Fed to exercise patience, and furthermore, wait for additional evidence inflation is beginning to push back towards policymaker’s 2% target,” she said.
Fed policy makers are set to have their next to last meeting of the year late this month, where they will once again consider an interest rate increase.