Inflation data not adding clarity

September inflation reports released last week did not provide the comfort many had hoped it would offer. In fact, they topped expectations and kept alive concerns that at least one more Federal Reserve rate hike may be in store before year-end.

While declining sequentially, wholesale prices (PPI) rose more than expected in September, and year-over-year prices actually increased, driven up by food and energy prices. Retail prices (CPI) followed the same pattern, falling sequentially but above expectations, on gains in housing costs and gasoline prices. The downward trend in inflation may be enough to allow the Fed to pass on raising the fed funds rate at its November 1 meeting. But the erratic path of inflation may convince the Fed to hold rates higher for longer. 

Weekly jobless claims were unchanged at 209,000, indicating a still low level of layoffs. But the University of Michigan sentiment survey echoed the inflation reports, as consumer confidence fell. Weaker assessments of personal finances, higher year-ahead inflation expectations (from 3.2% last month to 3.8% this month) and lower year-ahead business conditions made respondents uneasy. In particular, consumers are keenly aware of high food and gasoline prices. 

Last week also say the release of the minutes from the Fed’s September 20 meeting. Not surprisingly, they showed policymakers intend to proceed carefully. Another increase in fed funds target range may be required, but monetary policy should remain restrictive for some time. Fed communications likely will shift from how high rates should be to how long they should stay elevated.