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David Goodloe
David Goodloe
Articles (769) 

CPI Surges in September

Interest rate hike in December still seems likely

October 13, 2017

When Hurricane Harvey struck Texas in late August, it caused a disruption in production and distribution of gas and led to a spike in energy prices that was felt far beyond the Texas coast.

Consequently, the Labor Department’s Consumer Price Index showed a 0.5% hike in September on the heels of a 0.4% increase in August. It was the largest increase since January. Higher energy prices – gas prices rose 13.1% in September – were responsible for three-fourths of the increase. That was the biggest monthly increase in gas prices in more than eight years and more than twice the increase of the prior month, but the impact of the storm is fading as gas prices have been falling back to close to pre-hurricane levels in recent weeks. When energy and food prices are taken out of the mix, the CPI went up only 0.1%.

Most observers still expect the Federal Reserve to raise interest rates in December, but Reuters’ Lucia Murtikani wrote the report “suggests a December interest rate increase is not a done deal.”

That view was not prevalent, though.

“This report likely won’t change anyone’s mind about the inflation outlook a year from now, and it won’t stop the Fed hiking in December,” MarketWatch quoted Pantheon Economics’ Ian Shepherdson.

Erika Jensen, president of Respire Wealth Management in Houston, called the numbers “a mirage” since gas and food prices “are irregular” and not susceptible to “regular inflation.”

“Core CPI without food and gas didn't change much,” Jensen said. “We're looking at a 0.5% increase when food and fuel are included versus 0.1% without food and fuel. And that indicates that we're really not experiencing the inflation that should accompany a strong recovery. These numbers could play into the anticipated Fed rate hike decision in December, especially if the powers that be still feel like the recovery just isn't strong enough to handle policy that tightens money supply.”

Alex Doubet, CEO of Texas-based DoorHomes.com, emphasized a “persistent issue” that is hidden by the report – wage stagnation.

“Real wages over the past year have risen only 0.7%,” Doubet said, “and in September they actually fell 0.1%. I remain concerned that first-time homebuyers are going to continue facing headwinds as they try to start a new life with their families in a new home. Home prices are still on an upwards tear, but wages are not matching their growth. This will continue to push homeownership into the upper tiers of wage earners.”

John Boyd Jr., principal of New Jersey-based The Boyd Co. Inc., said an interest rate increase is “very likely” in December.

“While increased energy costs are responsible for this month’s inflation spike,” Boyd said, “I do expect the tight labor market and improving jobs numbers to drive inflation higher in the months ahead and towards the Fed's target of 2%.”

Alexander Kuptsikevich, analyst for London-based FxPro, called the report “disappointing.”

“[Thursday’s] strong PPI raised hopes for a strong CPI release today, yet inflation acceleration did not live up to expectations,” Kuptsikevich said. “The total annual inflation rate rose from 1.9% to 2.2%. Against expectations of reaching 1.8% and still below the Fed’s target of 2%, the core figure remained at 1.7% year over year. Retail sales also turned out weaker than expected. Today’s numbers create a picture of slower growth in consumer activity, the opposite of what the Fed wants to see if a rate hike is to stay on the horizon.”

Kuptsikevich elaborated, “Earlier this week, the FOMC Minutes stated that members are to assess upcoming inflation data in the months ahead. Today’s statistics will most likely strengthen the doves in the committee while, even if the December rate hike is not canceled, a March policy tightening appears all the less certain.”

About the author:

David Goodloe
I'm a journalist by training. I grew up in Arkansas and earned my B.A. at the University of Arkansas. I earned my master's degree at the University of North Texas. My background includes stints at newspapers in Arkansas and Texas and teaching news writing and news editing to students at the University of Oklahoma and Richland College here in Dallas. I'm a writer/editor at GuruFocus.

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