Inflation Takes a Breather

The Consumer Price Index (CPI) rose a muted 0.1% in September, half of what the market expected. A moderation in prices at the gas pump, which has already reversed, helped to hold down the rise in inflation during the month. Energy prices on a year-over-year basis also slowed dramatically. The result was a slowdown in the year-over-year pace of consumer inflation to 2.3%, the weakest pace since early this year. Unfortunately, gas prices have already picked up and will return in the inflation data for October.

More worrisome is the loss in oil supply we are likely to feel from Venezuela and Iran in the months to come. Those losses are likely to put a floor under rices, even as the U.S. and OPEC increase production.

The core CPI (excluding food and energy) also rose a muted 0.1% in September. A sharp drop in used vehicle prices largely offset gains elsewhere. Transportation costs, including a sharp 1% monthly increase in airfares. The year-over-year increase held at 2.2%, the same pace we saw in August.

Bottom Line
Recent increases in prices at the gas pump, supply-chain bottlenecks and higher tariffs all suggest that the slowdown in inflation will be temporary. This, combined with a further tightening of labor market conditions, will keep the Federal Reserve on track for another rate hike in December. The key to understanding the Fed is that officials are merely normalizing, not tightening monetary policy yet. That isn’t crazy; it’s prudent when the mandate from Congress is to stabilize prices over the long haul.

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