September’s CPI Research Notes

by Jim Baird on October 16, 2012

Headline inflation rose sharply in September, core prices modestly higher

The Consumer Price Index (CPI) once again rose sharply in September, increasing 0.6%.  The recent surge in inflationary pressures has reversed the index’s downward trend, but at 2.0%, headline inflation is still far from troublesome. 

Higher energy prices were again the primary culprit of the rising cost of living in September, although the rate of increase lessened modestly from the prior month. 

The core CPI, which excludes the more volatile energy and food sectors, increased by a modest 0.1% for the month, as the one-year change edged upward to 2.0%.  

Although rising energy costs have driven the recent increase in inflation, the effects of the summer drought do not appear to have been fully accounted for in food prices.  The impact of lower supplies of the impacted crops certainly has the potential to influence food costs higher in the months ahead. 

The recent increase notwithstanding, the Fed is clearly less concerned about inflation than elevated joblessness and the lackluster pace of growth.  Upward pressure on energy prices is not expected to be sustained as the global economy slows.  Core inflation also remains stable, while inflation expectations remain relatively well-anchored.  With perceived inflation risks still contained, the Fed should be able to maintain its accommodative stance and continue its focus on fostering better growth and lowering the unemployment rate.   

Despite better than expected results in recent jobs and retail sales data, the overall economic picture remains mixed.  Uncertainty remains prevalent on several fronts domestically, and the global slowdown is a source of risk to the U.S. economy as well.  Near-term risks appear to be skewed to the downside, leaving us cautious in our outlook.  However, policy action, or inaction, continues to be a wild card that could influence the direction of capital markets as policymakers try to stay out in front of developments globally.

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