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Inflation Spike – Real or Temporary?

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The puzzle of rising, or not rising, prices was evident in the September inflation data. Both producer and consumer prices increased at a faster pace than in August, with most of the gain coming from higher energy and gasoline prices as the hurricanes shut down refining capacity.  PPI increased 0.4 percent, the biggest jump in five months, due primarily to a 10.9 gain in gasoline prices. CPI was up 0.5 percent, the largest gain since January, as gasoline prices shot up 13 percent. But, similarity in the indices ends there. Whereas there was no difference between the headline and core PPI rates, core CPI was significantly lower.

With the impact of food and energy prices removed, core CPI was up just 0.1 percent. The difference reflects two key issues: most of the price surge in the consumer index came from energy alone, and companies are still not passing to consumers higher prices for most goods and services. The disconnect in the price chain and the aftermath effects of the hurricanes continue to make it difficult to know what the appropriate level of inflation is or should be. Year-over-year core CPI remains at 1.7 percent, well below the Fed’s target of two percent.

Other Key Indicators this Week:

JOLTS – The number of job openings declined slightly in August, but remains at a level consistent with a healthy job market. Total openings fell 58,000 to 6.08 million. The bulk of the decline was at manufacturers for non-durable goods. Construction and health care were among the sectors posting an increased need for workers. Both the hiring and quits rates fell by 0.1 percent.  The quits rate reflects people who voluntarily leave their job and signals confidence in the job market. Modest wage increase may be preventing people from seeking new jobs.

The Fed – It seems like we are always hearing something from the Federal Reserve. The minutes from the September FOMC meeting were released this week, providing more insight into what is keeping Fed officials up at night. Several explanations for the stubbornly low rate of inflation were debated at the meeting, ranging from "one-time factors that will fade over time" to "common global factors" keeping prices down in the U.S. and other advanced economies. Also up for consideration was how technology has made companies more efficient at setting prices. Several Fed officials maintained they want to continue looking at upcoming economic data to insure inflation is moving toward the two percent target, while others expressed concern that waiting too long to increase interest rates could lead to a surge in inflation that would be difficult to manage.

Retail Sales – U.S. retail sales surged 1.6 percent in September, the largest monthly jump since March 2015. The unusual increase was due to stronger auto sales and higher gasoline prices, both an effect of the hurricanes. Auto sales rose 3.6 percent, the largest jump in over two years, and receipts at gas stations rose 5.8 percent due to higher prices. Sales at building material stores jumped 2.1 percent, the biggest gain since February.  A better index to consider is the retail sales control group, which is used to calculate GDP and eliminates the more volatile sectors. This index increased 0.4 percent, slightly better than the average for 2017 of 0.3 percent.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.