December rate hike a done deal as inflation rises

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The latest monthly inflation figures from the United States rose gradually, cementing expectations of a Fed rate hike this December. According to official data, consumer prices continued to rise in October at a rate of 0.1% on a monthly basis.

The past three consecutive monthly increases in consumer prices marked the fastest three month rate of increase in consumer prices since 2012. On a year over year basis, headline inflation was seen at 2.0%.

U.S. Inflation Rate 2.0%, October 2017. Source: Tradingeconomics.com
U.S. Inflation Rate 2.0%, October 2017. Source: Tradingeconomics.com

Most of the contributions to inflation came from the uptick in consumer prices during September due to the hurricanes. Housing costs were seen rising 0.3% on the month and up 2.8% on an annual basis.

The increase in consumer price data comes as previous U.S. Producer Price Index Data indicated inflation could continue to increase in the coming month.

Energy prices were however weaker, falling 1.0% in October. Excluding the volatile food and energy prices, core consumer price index was seen rising 0.2% in October. On an annual basis, core inflation rate rose 1.8%. This was the highest core inflation rate since April this year.

The better than expected inflation data is expected to raise confidence among the central bank officials during the December meeting. Earlier, the markets were a bit cautious heading into the release of the CPI report.

A weaker than expected inflation rate was seen as significant headwind for the FOMC with the possible impact of even postponing a rate hike in December.

U.S. retail sales posts a modest increase in October

On the consumer spending side, data showed that Americans were more modest with their spending heading into the fourth quarter. With the holiday season fast approaching, consumers were slightly tightening their purses.

Data from the Commerce department showed that retail sales increased 0.2% in October compared to the previous month. Compared to the previous year, retail sales rose a healthy 4.6%. This outpaced the inflation rate as well as wages during this year. The data showed that consumers remained confident about the economy and the job prospects.

The report also revised previous figures which showed a 0.5% increase.

Economists had forecast a 0.1% increase in retail sales during October. The report showed that consumer spending was somewhat moderated after the hurricane related bump in September saw retail sales rising 1.9% on a revised basis.

Car sales contributed significantly to the retail sales report however, spending at restaurants and beverages also increased contributing to the retail sales growth in October.

Excluding motor vehicles, retail sales in the U.S. rose just 0.1%, while sales excluding gasoline rose 0.4%.

Consumer spending, which is seen as a key driver of the U.S. gross domestic product representing nearly two thirds of the economic activity, was seen to be rising modestly. Spending was also increasing as the U.S. economy enjoys low unemployment levels and rising consumer confidence.

However, wages continue to lag, rising at a slow pace. The overall better than expected inflation and retail sales figures from last week saw the markets pricing the December rate hike.

The next FOMC meeting is scheduled to be held on December 13 as according to the September FOMC meeting, the central bank is set to hike rates one more time this year. This will bring the Fed funds rate to 1.25% – 1.50% window.

However, following the release of the inflation report and the retail sales data, the U.S. Fed funds futures were seen relatively stable. The futures markets currently show the 30-day Fed funds rate around 1.28%. But this is expected to rise especially with the November jobs report and monthly data due early in December.

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