In the Fed’s coming decision of whether to raise interest rates or not, inflation is more likely to be the hinge on which the outcome pivots rather than employment.
By Peter Martin
Tuesday, November 17, 2015
Despite some recent indications of softening employment in the manufacturing sector, the labor market appears to be in fine fettle, as evidenced by the 5.0% unemployment rate and the 271,000 payroll growth that we saw for October. Inflation is a different story though, looking stagnant most of the year far below the Fed’s 2% target.
To hike rates in December the Fed will have to see enough evidence that inflation is at least heading upward so that they can be comfortable that it will eventually return to target. Today’s release of the Consumer Price Index (CPI) for October was a step in the right direction, with prices rising, though we remain a long way from where you could say there are any real inflationary pressures.
The CPI rose 0.2% last month, in line with expectations, following on from a 0.2% decline in September. This takes the annual change in CPI to 0.2%, up from flat in September. The core rate of inflation, which excludes food and energy prices in order to smooth out volatility, also increased 0.2% in October, while the year-on-year core rate remained as it was in September at 1.9%. That core rate, with its back-to-back solid readings might just be enough to give the Fed justification to tighten, but I think it will take another upward move at the headline level in November to fully cement expectations for a rate rise. The downward pressures on inflation still remain, after all: a strong dollar weighing on import prices and oil prices depressed by the global supply glut. US crude oil was $50 a barrel in the middle of October, but has been struggling just above $40 a barrel the last few days.
The other major domestic economic release of the day was industrial production, which fell 0.2% in October, the second successive month of contraction. The headline figure was dampened by weakness in mining and utilities (caused respectively by low commodity prices and unusually warm weather), but the closely-followed manufacturing component advanced 0.4%. Capacity utilization came in at 77.5%, while September’s reading for this measure was revised up from 77.5% to 77.7%. Manufacturing has been struggling with weakness in exports, a result of soft global demand and the strength of the dollar, and many anecdotal surveys had pointed to weakness (including the ISM manufacturing index) so hard evidence of an upturn in October is a welcome outcome. Once again, I would think the Fed will want to see another month of improvement in November to allay its fears, given the contractions seen in September and August.
Stocks on Wall Street opened slightly up, but quickly nosed down into negative territory. Shortly after the opening bell in New York, the Dow Jones was down 14 points or 0.08%, while the broader measure of the S&P 500 Index fell 0.05% to 2052.5. Dow components Home Depot and Wal-Mart both gained well over 2% after reporting better-than-expected earnings, but energy stocks declined, dragged down alongside falling oil prices. US crude oil futures dropped 1.5% to $41.05 a barrel.
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