U.S. Inflation, Retail Data Show Economy Ready for Fed Rate Hike

  • Core price gauge shows first annual pickup since January
  • Consumer demand steady heading into holiday shopping season

Economist Aleman Seeks Wage Support for Inflation

The U.S. economy delivered a double win for the Federal Reserve in October with an encouraging pickup in inflation and an unexpected gain in retail sales, further solidifying expectations that policy makers will raise interest rates next month.

The consumer-price index excluding food and fuel accelerated on an annual basis for the first time since January, while the overall cost of living rose in line with forecasts, a Labor Department report showed Wednesday. The rise in retail sales last month followed a bigger September advance than previously estimated, according to Commerce Department figures.

Highlights of CPI, Retail Sales (October)

  • Consumer-price index rose 0.1% m/m (matching est.) after 0.5% rise the prior month; increased 2% y/y (matching est.)
  • Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; climbed 1.8% y/y (est. 1.7%)
  • Overall retail sales rose 0.2% (est. unch.) after a revised 1.9% increase in prior month

Together, the reports are “a reflection on the fairly solid economic environment we’re currently enjoying,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. “Inflation is moving closer to the Fed’s target on the core. A December rate hike seems fairly certain, and justifiable,” and “the outlook for consumer spending looks good.” 

Investors on Wednesday saw a 93 percent chance of a Fed interest-rate increase in December, up from 91 percent yesterday. U.S. stocks and yields on 10-year Treasuries were lower as new obstacles emerged on a tax plan.

Higher costs for shelter, medical care, air fares and used vehicles produced a broad-based advance in core CPI, signaling businesses may get more pricing power over time.

Read more: Bloomberg Economics says CPI may tilt scales for hesitant Fed officials

While the price gains also helped to boost retail sales -- since those data aren’t adjusted for inflation -- demand looked resilient heading into the holiday shopping season as consumers purchased more furniture, electronics and clothing, and spent at restaurants.

The CPI data will help inform policy makers on where inflation stands vis-a-vis their projections, though the Fed’s preferred gauge is a separate figure based on consumer purchases and issued by the Commerce Department. That measure has matched or exceeded the Fed’s 2 percent goal in just two months of the past five years. Some central bank officials focus on the measure excluding food and energy, which is also below their target. October data are due Nov. 30.

Michael Gapen, chief U.S. economist at Barclays Capital, discusses the latest inflation and retail sales data.

(Source: Bloomberg)

Nonetheless, the latest report offered more evidence that the cost of living is moving in the right direction, after Fed officials began to question long-held assumptions that low unemployment would cause inflation to accelerate.

Housing costs were a significant factor in October, with the shelter index climbing 0.3 percent. That included a 1.6 percent increase in lodging away from home and a 0.3 percent increase in owners’ equivalent rent, one of the categories designed to track rental prices. Expenses for medical care climbed 0.3 percent, and used-vehicle prices rose 0.7 percent, ending a nine-month streak of declines.

Prices for wireless-phone services and hotel stays both increased. In recent months, several Fed officials have cited changes in these costs as transitory factors affecting inflation. At the same time, a 1 percent drop in energy prices weighed on overall inflation in October, and costs for new vehicles, apparel and recreation showed declines.

While a December rate increase by the Fed would be the third this year, inflation data in coming months will also play a role in the timing and number of rate increases in 2018, when Jerome Powell is set to take over as central bank chairman from Janet Yellen. Officials in December will update their projections for the benchmark interest rate, after September forecasts showed a median forecast of three quarter-point hikes next year.

The latest sales figures also bode well for retailers gearing up for the holiday season. Nine of 13 major retail categories showed month-over-month increases in the value of sales, indicating American consumers will continue to fuel the economy in the fourth quarter, helped by steady hiring and an increased wealth effect from soaring stock prices and higher property values.

“As long as a robust labor market is generating sizable income gains, the consumer should remain on a solid track,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.

— With assistance by Vince Golle

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