Rising inflation will likely lead to Fed rate hike in September

The consumer price index (CPI) rose .4% last month, the index’s largest monthly increase in over two years and a modest gain over April’s paltry .1% number. The CPI measures the comprehensive price of a basket of goods for a typical U.S. urban household and is a general indicator of core and periphery inflation.

The significant rise in CPI last month is mostly attributable to gasoline prices, which rose 10.4% in May. All other items besides food and energy goods increased by a mere .1%

Experts are now predicting a likely September interest rate hike by the Federal Reserve as a result of the new CPI number, although a strong U.S. dollar is still putting some downward pressure on otherwise inflationary economic conditions. Short-term interest rates have been suppressed at almost zero for over six years now, a policy that the Fed is using to incentivize borrowing and create business expansion.

The Federal Reserve described the U.S. economy’s growth as “moderate” this past week, and even said that inflation is starting to move in the direction of their 2% year-over-year target.

Besides inflation nearing a 2% annual rate, the Fed also wants to see a stabilizing economic situation in the U.S. before moving the needle up on lending rates. To that end there was also good news on Friday, as the Labor Department announced that unemployment insurance applications have declined 15 straight weeks, and are now at a 15 year low.

A third report published on Friday by the Philadelphia Federal Reserve showed that its business activity index (an indicator of factory expansion in the region) reached a 2015 high, and demand for goods and actual shipments both reached their highest levels since November. “Prices paid” and “prices received” indexes, a measure of costs and product prices for businesses, also rose to 2015 year highs.

While there was a slight net increase in core inflation in May, with the cost of medical, new cars/trucks, airline tickets, tobacco and alcohol all going up, prices for apparel, used cars/trucks, and residential furnishings all went down.

Food prices (not included in the definition of core inflation), have remained flat since the end of March.

Image from the U.S. Labor Department

Image from the Wall Street Journal








Comments are closed.