Prices edged higher again in the past month, pushing the consumer price index (CPI) up by 0.3% in October from the month prior, in line with expectations. Excluding food and energy, core CPI rose by 0.2% for the month, also in line with consensus forecasts. Over the past year, consumer inflation has edged higher, with both the headline CPI (2.5%) and core CPI (2.1%) indicating that inflation has picked up modestly since this time a year ago.
(On a lighter note, the price of turkey fell by 1.3% last month and have declined by nearly 5% over the past year. That’s bad news for turkeys, but good news for American families preparing to celebrate the Thanksgiving holiday.)
Still, given the strength of the economy, the tightness of labor markets, and the fact that the economy is now in its tenth year of expansion, the fact that inflation isn’t higher is a positive.
Policy actions taken by the Federal Reserve to take the edge off via interest rate hikes have certainly helped, and the expectation that policymakers will continue to hike is also helping to keep inflation expectations in check.
The strength of the U.S. Dollar has also helped to keep a lid on import prices and inflation more broadly, supported by a strong economy and an active Fed.
Additionally, rising energy costs over the past year had been a significant contributor to rising inflation, but the recent sharp decline in crude oil prices should provide some near-term relief.
Still, there are upside risks to inflation. The labor market remains tight, with unemployment holding firm at 3.7% last month and wage growth topping 3% on a year-over-year basis in October. Further upward pressure on wages is almost certainly going to filter through to consumer prices as well, although it’s unlikely that businesses will be able to pass along all of those cost increases to their customers.
It is all but certain that the Fed will close the year with one more rate hike, though the outlook for Fed policy in 2019 is less clear. A tight labor market and relatively stable inflation outlook point to a Fed which will remain committed to their path of policy tightening, although the recent downturn in housing strongly suggests that the combination of rising prices and higher rates is already starting to bite.
The impact of monetary policy is only felt with a meaningful lag, and while the Fed doesn’t want to find itself behind the curve in containing inflation, it also doesn’t want to act too aggressively and choke off growth. That balance may become more difficult for the central bank in 2019, making monetary policy a factor to be watched even more closely in the coming year.
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