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Will September Rise in CPI Affect Fed’s Rate Hike Decision?

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US CPI rose in September

According to a report from the United States Bureau of Labor Statistics, US CPI (consumer price index) rose 0.3% in September 2016 compared to a 0.2% rise in August 2016. The September reading met analyst expectations. It was the highest increase since May 2016.

The rise in the consumer price index was mainly due to the higher price of gasoline. However, food prices were constant in September. It was the third consecutive month of flat food prices. On a yearly basis, the consumer price index stood at 1.5% as of September 2016, which is still below the Fed’s target level of 2%. However, the improvement in consumer price index is an important sign for Fed policymakers. The decision to maintain interest rates in September was mainly due to a slower increase in inflation. However, these figures are raising confidence that the Fed could hike the interest rates at its December meeting.

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Rate hike probability

In the present scenario, the estimated probability of a rate hike in December 2016 was 65.9% as of October 18, 2016. One month ago, it was 55.2%, and two months ago, it was 47.3%. According to many market participants, a rate hike is appropriate when the economy (VFINX) (SPY) (QQQ) shows strength.

Many fund managers say that the Fed lacks confidence and that it’s ignoring many important indicators in regards to the condition of the US economy (VOO) (IWM). Jeffrey Gundlach said that the Fed may keep interest rates lower until unemployment reaches close to 4%.

In the next part of this series, we’ll see what indicators investors should look for this week.

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