Consumer prices grew at the fastest pace of the cycle for a second straight month in September.
As shown in the LPL Chart of the Day, the core Consumer Price Index (CPI), which excludes food and energy prices, rose 2.4% year over year last month. Consumer prices increased at a healthy pace, even as year-over-year growth in the core Producer Price Index (PPI) declined for an eighth straight month.
We have yet to see slowing producer price growth weigh down consumer inflation, likely because U.S. companies still have ample pricing power amid solid domestic consumer demand.
“Consumer inflation has picked up recently, even as trade tensions and slower global growth have weighed on producer prices,” said LPL Financial Chief Investment Strategist John Lynch. “We believe full employment, rising wages, and low interest rates will help sustain healthy but manageable inflation growth going forward.”
However, stronger inflation could complicate the Federal Reserve’s (Fed) plans. In minutes of the Fed’s September meeting, many participants cited tepid inflation in justifying the second 25 basis point (0.25%) rate cut of the cycle. There was also robust discussion on market positioning for future Fed cuts. A few participants mentioned the Fed may have to better align market expectations with policymakers’ own expectations for the future path of policy. Rate projections (in the “dot plot”) show that 10 of 17 policymakers expected to keep rates unchanged through the end of the year, so the Fed could try to steer markets toward less accommodation in its public commentary going forward.
Ensuring stable inflation is one half of the Fed’s dual mandate, and year-over-year growth in core Personal Consumption Expenditures (PCE), the Fed’s primary consumer inflation gauge, is trending back towards 2%. Historically, year-over-year core CPI growth has typically run 25 to 50 basis points (0.25–0.5%) higher. Even though most gauges of consumer health look solid (including inflation measures), surveys of manufacturing and services activity have weakened. The Fed is likely to continue to be proactive in supporting the economy through the current slowdown, but it also needs to signal to markets that it still views current policy as a mid-cycle adjustment.
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