When the October CPI numbers were released on Thursday, I thought it was curious how little attention they received on Bloomberg radio during my drive to work. Maybe because it was a report that came in exactly as expected, I thought. After collecting the data and doing a little bit of analysis, I’m not so sure.
Let’s start with the basics. The year over year change in the Consumer Price Index for October 2016 was 1.64%. The ten-year annualized change is 1.979%. These numbers are close enough to the Federal Reserve’s own 2% target that interest rates should be much closer to normal*. A rate hike in December is more than fully justified. Two rate hikes next year is below the minimum threshold — I would prefer to see four.
Inflationary pressures have been slowly building since May 2015. They peaked in May 2016 and have slowly been moving lower. For October, increases in inflation are seen in Housing, Apparel, Transportation, and Medical Care. Dropping off the list is Recreation and Other. In both cases, the rate of inflation is slowing. Food & Beverage and Education & Communication are in deflation. For the category of Food & Beverage, it has been in deflation for two consecutive months. This is the first for Education & Communication.
For the month of October, 69% of the index is seeing increasing inflation, 22% of the index is seeing deflation, and the remaining 9% is seeing a slowing rate of inflation. The sub-index that is experiencing increasing inflation has a year-over-year rate of 2.34%. This sub-index is on a four-month stretch where the rate is increasing at an increasing rate (from 0.95% to the current 2.34%).
The slowing inflation rate sub-index is slowing at a higher rate (0.06% last month to 0.98%). The deflation sub-index is also increasing from -0.60% to -0.28%.
What this tells me is inflationary pressures already exist in all three sub-indexes of the overall index. The Federal Reserve is still behind the curve and getting further behind.
* I know I have mentioned the concept of what constitutes normal for interest rates is elusive, but something close to 3% is justifiable.