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How Rising US Consumer Price Index May Affect Fed Decision

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US consumer price index

According to a report from the United States Bureau of Labor Statistics, the US CPI (Consumer Price Index) rose 0.2% in August 2016 as compared to a flat performance in July 2016. The August reading was slightly above the analysts’ expectations of a 0.1% rise.

CPI was unchanged in July mainly due to a ~12% fall in gasoline prices during the month. The energy index (XLE) fell 1.3% in July 2016. However, food prices were constant in July. However, in August, CPI rose due to the rise in the cost of medical care, motor vehicles, communications, apparel, and tobacco.

The US (QQQ) (SPY) (VFINX) core CPI, which excludes food and fuel, rose 0.1% in August as compared to a fall of 0.3% in July 2016, which met market expectations of a 0.1% rise.

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Will rise in CPI support the Fed’s decision-making process?

Inflation is one of the key components in the Fed’s rate hike decision. The Fed’s preferred measure is the U.S. Department of Commerce’s personal consumption expenditure. A few days back, some Fed officials spoke in favor of a possible rate hike at the September 20–21 meeting while others suggested that the Fed would continue its dovish stance.

Fed chair Janet Yellen said at the Jackson Hole Symposium that the Fed’s focus is to prepare a resilient monetary policy framework for the future. The Fed aims to determine whether the existing tools are sufficient to respond to future economic crises. Yellen focused on two of the Fed’s most important tools: large-scale asset purchases and increasingly explicit forward guidance. She also added that the asset purchase program helped the US economy (IVV) (VOO) (SPXL) to recover from the recession. Yellen hinted that there could be a rate hike at the September meeting if the labor market shows strong numbers for August 2016. The question in investors’ minds is whether the small rise in inflation will prompt the Fed to hike interest rates in September.

In the next part of this series, we’ll analyze the ZEW Indicator of Economic Sentiment for the Eurozone in September 2016.

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