Consumer Inflation Not as Hot as Producer Inflation, but Plenty Justification for Rate Hike

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After a strong reading on the Producer Price Index (PPI) for November, the U.S. Department of Labor has reported a strong reading for the Consumer Price Index (CPI) in that month as well. The CPI report matters more than the PPI because it measures consumer inflation. These numbers are not incredibly hot, but they should continue to justify an expected rate hike, with the decision on interest rates due later today.

Headline CPI rose 0.4% in November from the prior month, and this was boosted by a 3.9% gain in the energy price index. If you back out food and energy prices, it showed that the core CPI was up just 0.1% in November’s monthly reading. Dow Jones was calling for a headline CPI gain of 0.2% and a core-CPI reading of 0.2%.

Where inflation looks hotter is in the annualized numbers. Headline CPI was up 2.2% and core CPI was up 1.7% from November of 2016. The Federal Reserve wants inflation to be in a 2.0% to 2.5% range.

The annualized inflation readings were far hotter in producer prices than in consumer prices. Some economists feel that higher prices are harder to pass on to consumers, but it takes a few months of higher readings before committed prices get raised. And much of the inflation pressure that gets felt at the consumer level revolves more around energy and food prices than it does on other influences.

As far as just how much energy contributed to inflation, the Bureau of Labor Statistics (BLS) reported that about three-fourths of the all items (headline CPI) increase was from that energy index. The gasoline index led the charge with an increase of 7.3%, while other energy components rose as well. In the annualized readings, energy was up 9.4% from a year ago.

The BLS data also showed that the food index was unchanged in November’s monthly reading, with the “index for food at home” actually posting a small drop in November, with four of six major grocery store food group indexes

The overall food index was still up 1.4% from November 2016. Of that gain, the largest contributing annual inflationary factors were shown to be in meat, poultry, fish and eggs.

As far as the energy gains seen from a year ago, the BLS showed the following annualized price changes:

  • Fuel oil index rose 18.6%.
  • Gasoline index rose 16.5%.
  • Natural gas index rose 3.6%.
  • Electricity index rose 2.5%.

Another area of weakness, somewhat surprising considering stronger retail sales data we have seen of late, was that the apparel index fell by 1.3% in November, and the BLS showed that to be its largest decrease since September 1998.

Investors and economists have all expected the Federal Reserve to hike interest rates on Wednesday. This CPI reading did nothing to change that expectation. The CME’s FedWatch Tool is signaling better than a 90% chance for an interest rate hike on Wednesday, but market watchers and investors have a higher expectation as federal fund futures at the CME are already signaling that fed funds would trade closer to 1.30% than the 1.00% to 1.25% prehike target range that has been in place for several months.

CME fed fund futures are split now between March and April for the dividing line about when the next rate hike is expected.

Today also marks the end of Janet Yellen’s tenure as Fed chair.