Tame Inflation Keeps the Door Open for Easy Money Policy

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The U.S. Bureau of Labor Statistics’s seasonally adjusted Consumer Price Index for All Urban Consumers, or CPI-U, increased by 0.2 percent on the month in September. This was in line with economist expectations and consistent with the generally soft price pressures experienced over the past several months. Headline consumer prices are up 1.2 percent on the year.

Investors have kept inflation data in their periphery recently because of the Federal Reserve’s aggressive stimulus program. Quantitative easing — the name given to the Fed’s ongoing purchases of agency mortgage-backed securities and longer-term Treasury securities — has four primary effects on the economy: higher inflation expectations, currency depreciation, higher equity valuations, and lower real interest rates.

Most of these effects have manifested in the U.S. to some degree, but inflation data released over the past few months have come in surprisingly soft. Earlier this week, the BLS reported that its index for producer prices actually decreased 0.1 percent on the month. The PPI interprets price changes from the perspective of the seller and can be used as a leading indicator of inflation because it measures input price pressure.

The core CPI, which excludes often volatile food and energy prices, increased 0.1 percent on the month, slightly below economist expectations for a 0.2 percent increase. However, it is up 1.7 percent on the year, indicating an inflation rate much closer to the Fed’s 2 percent target.

Within the core measure, the price index for shelter costs increased 0.2 percent, while medical care expenses increased 0.3 percent. The new vehicles price index increased 0.2 percent. A 0.5 percent decline in apparel prices put some negative pressure on the overall index.

Outside of the core measure, the index for energy prices increased 0.8 percent, a jump that follows a 0.3 percent decline in August. Food prices were flat, which follows a 0.1 percent increase in August.

The Fed’s preferred method of measuring inflation is by personal consumption expenditures. The PCE index, managed by the U.S. Bureau of Economic Analysis, increased 0.3 percent in August and has averaged an annual rate of increase of about 1.8 percent (September data won’t be released until November).

The Fed concludes a two-day policy meeting on Wednesday. Given the recent partial government shutdown and relatively weak labor market, policymakers are not expected to announce a tapering of asset purchases.

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