Much like last Friday’s companion report from the U.S. Department of Labor on producer (wholesale) prices, this morning’s release of consumer prices for the month of September made for another decent reading on inflation. Specifically, the report showed that the Consumer Price Index was up 0.6% on a seasonally adjusted basis, relatively in line with the consensus expectation of a 0.5% increase.
A closer look reveals that the primary reason behind the uptick was a rise in energy prices. The energy index rose 4.5% in September, reflecting elevated oil and gasoline prices in recent months. However, the September energy component did moderate some, falling from 5.6% in August to the aforementioned September reading. Meantime, the food index rose a modest 0.1%, down slightly from the 0.2% advance in August. More important, the index for all items, excluding the volatile energy and food components, rose a rather pedestrian 0.1%, the same as in July and August. Overall, the 12-month change in the index for all items was 2.0% in September, a figure that is well below its recent peak of 3.9% in September 2011.
The latest benign reading on inflation is also within the Federal Reserve’s target level. Thus, the central bank should have no problem continuing its aggressive monetary actions in an effort to stimulate the economy. The Fed’s dual mandate calls for stable prices—which looks to be the case right now—and maximum employment. The latter issue is still a major concern, which has prompted the latest round of quantitative easing, dubbed QE3. On September 13th, the Federal Reserve said it would buy $40 billion of mortgage bonds a month until the nation sees what Chairman Ben Bernanke described as a “sustained improvement in the labor market.” If nothing else, the latest tame reading on inflation puts no pressure on the Federal Reserve to raise interest rates. The lead bank plans to keep rates at their current level for the foreseeable future, perhaps even until the early stages of 2015.
All in all, the latest reading on consumer prices shows that inflation is not a major issue right now for the central bank. This data, along with yesterday’s nice jump in retail sales, are good signs heading into the all-important holiday shopping season. The services sector accounts for roughly two-thirds of the nation’s economic output, so an improvement in this area could prove fourth-quarter GDP growth expectations conservative, which would be a good scenario for an economy that is currently moving along at a rather pedestrian pace at this moment.