Consumer Prices Rise As Expected

Progress is being made at the headline level but less so on the core. Consumer prices rose a noticeable and as-expected 0.3 percent in September with energy surging 2.9 percent on the month and owners' equivalent rent up 0.4 percent, two important areas of strength. The year-on-year rate for the CPI is up 4 tenths to plus 1.5 percent which is the highest since October 2014.

However, when excluding energy and also food, which was flat in the month, the price increase slows to only 0.1 percent which is below Econoday's low forecast. The core's year-on-year is down 1 tenth to 2.2 percent. This latter rate runs about 1/2 percentage point above the Fed's target rate, the PCE core, but it's the direction that counts and the dip does not point to a September increase for the Fed's gauge.

Weak areas in September include apparel, down 0.7 percent on the month, and communications, down 0.8 percent. New vehicle prices are down 0.1 percent with used vehicles down 0.3 percent.

The Bureau of Labor Statistics has revised the all-items index back to May last year for corrections in the prescription drug index. The year-to-date gain for the all-items index is 1.7 percent vs plus 0.6 percent at this time last year. In another note in this report and a reminder of how soft inflation has been, the government has set the 2017 Social Security cost of living adjustment at plus 0.3 percent.

Inflation may be improving but the risk that accommodative monetary policy will overshoot the Fed's 2 percent target is not front and center, especially at a November FOMC that will immediately precede the presidential election. The December FOMC, however, is another story but there's still plenty of data to go.

Recent History Of This Indicator:
Outside of medical costs, consumer prices have been flat and have shown little benefit from on-and-off pressures in import prices and producer prices. The consumer price index rose a modest 0.2 percent in August with forecasters calling for a 0.3 percent rise in September. Less food & energy, prices rose a constructive 0.3 percent in August but here a slowdown is expected, to plus 0.2 percent.