Consumer Inflation Not Following Wholesale Inflation Above Fed’s Target Range

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It was just on Tuesday that the markets had to deal with a hot inflationary number that was stronger than what had been seen in several years. The U.S. Department of Labor’s report on the Producer Price Index (PPI) for final demand showed annualized inflation in October rising more than 2%.

Headline PPI rose by 2.8% from October of 2016, and core PPI rose by 2.4%. Even if you back out energy and trade services, the deeper annualized core inflation was up 2.3%.

Then on Wednesday morning, the Labor Department’s Consumer Price Index (CPI) figure rose in October by 0.1% on the monthly reading (from September) and the core rate (excluding food and energy) rose 0.2% from September.

Where the real inflation is measured is in the annual readings of CPI, and October of 2017 saw prices 2.0% higher than in October of 2016 on the headline CPI. The core CPI rose by 1.8% from a year ago. While these are close to the Federal Reserve’s 2.0% to 2.5% threshold, they are far less hot than the producer prices, and they are a dialing down of some stronger prior reports.

Another reason for concern about inflation’s real strength is that oil prices have had a really bad week, and some economists believe that oil prices (and the gasoline prices used to get goods to market) are the biggest non-consumer demand issues when it comes to how strong inflation is.

After the bump up on Tuesday, 24/7 Wall St. reminded readers that higher wholesale inflation (PPI) can have a lag before appearing as inflation at the consumer level (CPI). Some businesses have inventories they have to work off from lower prices in prior months, and some businesses just have a hard time passing on higher costs to consumers at the register.

Consumer prices are still close to that 2.0% to 2.5% target range set by the Fed. That target range would support further rate hike efforts ahead. As of now, the market is really only pricing one more rate hike in 2018 after an expected hike next month. Unfortunately, the dot-plots issued by the Fed were forecasting more rate hikes in 2018.

The disparity of the market expectations and policy-maker expectations continues. Stay tuned.