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U.S. inflation rises 2.5%. Retail sales rebounds

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Consumer prices in the United States rose at the fastest pace since the start of the year in October. The surge in inflation was driven by higher gas prices and a rebound in the price of automobiles including used cars and trucks.

The consumer price index or CPI which measures the prices paid by U.S. consumers rose by 0.3% in October from the month before. Data from the Labor Department showed that this was the biggest monthly gain since January 2018. On an annualized basis, inflation was seen rising 2.5% in October.

Excluding the volatile food and energy prices, core inflation rose by 0.2% matching the median estimates. This brought the annual core CPI to rise 2.1% on the year. The increase in inflation comes as the U.S. Federal Reserve is targeting an inflation rate of 2.0%.

Gains in the energy prices which saw gas prices rising was seen driving inflation higher primarily. However, the recent decline in international oil prices could potentially weaken consumer prices in the coming months. This is expected to push inflation slightly lower from the current levels of 2.5%.

Another gauge of inflation used to measure automobiles rose 2.6% during the month. This was also the biggest monthly gain and the highest seen in more than nine years.

The increase in prices came due to a rebound after prices for used automobiles fell sharply in September. However, the surge in automobile prices is also expected to drop in the coming months.

The latest inflation data is expected to cement expectations that the Federal Reserve will hike interest rates at the December FOMC meeting. Although the Fed watches the core PCE data to gauge inflation the surge in headline CPI is expected to push the PCE prices higher as well. In September, core PCE price index rose just 0.1%. However, this was the fourth straight month of increase in the core PCE prices.

The Central Bank’s rate hikes come as a measure to reign in spending and to ensure that the U.S. economy does not overheat. The central bank hiked interest rates three times this year with the Fed funds rates currently at 2.0% – 2.25%.

At the September Fed meeting, where rates were hiked, officials noted that they anticipate three to four rate hikes next year.

U.S. retail sales surge sharply in October

Later in the week, on Friday, retail sales report from the United States showed that consumer spending picked up the pace in October. This came after spending declined for two consecutive months previously.

Data showed that sales at retail stores and restaurants rose 0.8% from the month before in October. The data from the Commerce Department exceeded the forecasts of a 0.5% increase on the month. Sales figures from the previous two months were however revised lower to show a 0.1% decline in September and August.

The jump in retail sales came due to an increase of 3.5% in spending at gasoline stations. Higher fuel prices and automotive sales were seen adding to the rise.

Excluding motor vehicle sales, retail sales rose 0.7% during the month and 0.5% when excluding gasoline prices. However, excluding both these categories saw retail sales rising just 0.3% on the month.

Consumer spending is seen to be one of the key drivers of the gross domestic product. The increase in consumer spending was therefore seen as a signal the fourth quarter GDP in the U.S. got off on a strong start. Retail sales department stores increased 1.3% in October. This was the strongest pace of increase since May. Meanwhile, sales at non-store retail such as online purchases increased 0.4%.

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