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Inflation Will Hit Fed's 2 Percent Target Sooner Than Many Expect

Inflation Will Hit Fed's 2 Percent Target Sooner Than Many Expect
(Dollar Photo Club)

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Wednesday, 18 November 2015 07:40 AM Current | Bio | Archive

Global financial markets continue showing resilience amid the ongoing war against terrorism.

However, the French economy, especially its tourism industry, no doubt will suffer.

Meanwhile, we got the Consumer Price Index (CPI) for October that went up an a yearly basis by 0.2 percent, up from 0.0 percent in September while the CPI less food and energy remained unchanged at 1.9 percent. At first sight, nothing to write home about it, but that first impression changes dramatically when we dig deeper into the numbers in the context of inflation generation.

Average hourly earnings is definitively accelerating as showed by  the 3.1 percent growth rate we have seen over the last 3 months between July and October this year and by the 2.4 percent rise year-on-year.

Looking at the “rents” factor, which accounts for close to half of the acceleration in the core CPI this year and with rental vacancy rates today at 7.3 percent, which is the lowest rate since Q3 of 1994 year when it stood at 7.2 percent while wage growth is rising, I don’t think it’s an overstatement saying we can logically expect rents to put further upward pressure on inflation in 2016.

Because of all the noise that is made about the impact of the strength of the dollar it becomes more than interesting to see how what we could call weakness in core goods’ prices is apparently losing its vigor, which suggests the impact of the dollar moves on consumer prices is rather limited, which makes my think exporters to the U.S. prefer expanding their profit margins rather than invoicing cheaper prices, in dollar terms of course.

I’d like to add the apparently limited pass-through of dollar moves to U.S. prices implies, at least in my opinion, rather limited spill-overs from a stronger dollar to the U.S. economy.

The Federal Reserve Bank of Cleveland’s “Median Consumer Price Index” rose 0.2 percent in October, which represents an annualized rate of 2.5 percent. Yes, it's starting to look like the Fed is getting more and more behind the curve.

I personally have little doubt (of course, I could be wrong) we’ll see the 2 percent CPI much earlier than many expect.

That said, it was certainly interesting to see how quickly the White House reacted to a Republican-backed bill to make the Federal Reserve set interest rate policy using a mathematical rule issuing the following statement: “If the president were presented with (the legislation), his senior advisers would recommend that he veto the bill.”

Separately in a letter to lawmakers, Fed Chair Janet Yellen said that the bill would “likely lead to an increase in inflation fears and market interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability.”

Yes, George Washington was right when he said: “It is better to offer no excuse than a bad one.”

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HansParisis
I personally have little doubt (of course, I could be wrong) we’ll see the 2 percent CPI much earlier than many expect.
investors, fed, rate, economy
479
2015-40-18
Wednesday, 18 November 2015 07:40 AM
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