Main takeaway:
  • Core CPI inflation momentum rose to 2.2% (annualized). The last two months hit 2.7% (ar).
  • Core services inflation increased from 2.5% yoy in June to 2.8% yoy in October. Core goods are down 0.7% yoy.
  • Sticky-price CPI (a sign of anchored expectations) is trending up.
  • Is that enough to be reasonably confident inflation will move back to its 2% objective?

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

So Fed needs to be reasonably confident inflation will move back to 2%. Are we there yet?

A month ago, Fed comments suggested the Fed was getting increasingly worried about downside risks to inflation (due to oil prices, strong dollar, slowdown in economic data). More recently, the message was more upbeat and a few Fed speakers even mentioned the keyword -- saying they were getting confident inflation would converge to target.

Today's CPI print showed an increase in core inflation momentum (3-month annualized inflation) and thus should increase Fed's confidence. Core inflation momentum moved from 2% to 2.2% -- but the annualized inflation in the last two months is an even higher 2.7%:

Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.

But behind the stability in YoY core inflation there's a growing divergence. Core goods are 0.7% lower than a year ago and core services are 2.8% higher. Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.

Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.


Sticky-Price CPI (a sign of anchored expectations) is trending up

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".




Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.


Market-based inflation expectations and compensation