Higher Fuel, Rents Push Inflation and Could Guarantee Fed Rate Hike in December

Consumer prices in the United States have finally recorded their biggest gain, in the last five months, with the cost of gasoline and rents in September surging. Economists say, then, this points to steady inflation which could help to keep the Federal Reserve on track to raise its interest rates, which is expected to hit in December.

According the US Labor Department—as of Tuesday, Oct. 18—the Consumer Price Index increased by 0.3 percent last month, following a 0.2 percent the month before. As such, the year (through September), the CPI grew at a steady and healthy rate of 1.5 percent. This is the biggest year-on-year increase since October of 2014. In August, the CPI rose 1.1 percent on the year.

“The upward creep of prices weakens any argument against a rate increase in December,” explains Miller Tabak chief economic strategist Anthony Karydakis, in New York. “The economy is close to full employment and prices are starting to respond to that reality.”

Examining this more closely, the US central bank currently has an inflation target of 2 percent and is currently tracking an inflation measure of 1.7 percent. Furthermore, Federal Reserve Vice Chair Stanley Fischer comments that the central bank was, in fact, “very close” to its inflation target as well as its employment targets.

In addition, RDQ chief economist John Ryding notes, “As inflation approaches 2 percent, the argument that the economy has more room to run becomes harder to make and we believe the Fed remains on track for a rate hike in December.”

In addition to higher fuel prices, consumers also found higher ticks for grooming, motor vehicle insurance, tobacco and airline fares. At the same time, though, communications prices saw their largest decline in roughly the last two years; and heavy discounting at retailers kept apparel prices 0.7 percent below normal. Also, the average price of motor vehicles fell.
The government also revised the prices for prescription drugs between May and August of this year, correcting the original data. But prescription medications only account for about 1.4 percent of the Consumer Price Index.

MUFG Union Bank chief economist Chris Rupkey explains, “Inflation is moving up, showing this is not an economy that is undergoing serious demand-based weakness.”

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