The Consumer Price Index Declined 0.1% in August
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Implications: The final inflation report heading into today's Fed meeting went off with a wimper, not a bang. Headline prices declined 0.1%, but all of the decline (and then some) was due to energy prices, which declined 2% in August and are down 15.0% in the past year. Excluding energy, consumer prices rose 0.1% in August and are up 1.8% in the past year. And while overall inflation is up a mere 0.2% in the past year, prices have risen 2.3% at an annual rate over the past six months. Core prices, which remove the volatile food and energy components, continue to hover around 2% inflation from a year ago, very close to the Fed's inflation target. So regardless of the outcome of tomorrow's decision, inflation should eventually put pressure on the Fed to raise rates faster than the market expects. Core consumer prices in August were led higher by housing. Owners' equivalent rent, which makes up about ΒΌ of the CPI, rose 0.2% in August, is up 3% in the past year, up at a 3.5% annual rate in the past three months, and will be a key source of higher inflation in the year ahead. While some scaremongers warn about deflation, others stoke fears of hyperinflation. But the truth is that neither is a threat at present. What we have is low inflation that is likely to gradually work it's way upward over the next few years. On the earnings front, "real" (inflation-adjusted) average hourly earnings rose 0.5% in August, and are up a modest 2.0% in the past year. In other words, increases in consumer spending have been driven by higher earnings, not consumers loading up on debt. Taken as a whole, recent trends in both consumer and producer prices, paired with solid employment growth and a 5.1% unemployment rate, suggest the Fed has solid grounds to announce the start to rate hikes in tomorrow's statement.

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Posted on Wednesday, September 16, 2015 @ 10:29 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.