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SEPTEMBER 18, 2017 —  CPI FOR AUGUST BEATS CONSENSUS ESTIMATE

The August CPI rose 0.4 percent beating consensus expectations of a 0.3 percent increase.  The increase is the greatest seen since January 2017.  The 12-month pace of change is up 1.9 percent from 1.7 percent last month.  These results must be viewed cautiously as the movement in CPI was affected by a surge in gas prices following Hurricane Harvey.

Energy prices rose 2.8 percent in August, the largest monthly increase since a 4 percent jump seen in January and 6.4 percent greater than levels last August.  Gasoline prices were up 6.3 percent last month or 10.4 percent higher than a year ago.  When eliminating energy and food prices, the core CPI rose 0.2% vs. 0.1% in July, with the year-on-year growth rate steady at 1.7% for the fourth consecutive month.

Even though the CPI seems on a slight upswing, the Fed’s preferred measure of inflation is the personal consumption expenditures (PCE) price index which excludes food and energy.  The annual increase in the PCE has missed the Bank’s 2 percent inflation target since mid-2012.  The PCE rose 1.4 percent in July 2017, the smallest year-over-year increase since December 2015.

At the upcoming September 19-20 Fed meeting, economists are expecting an announcement regarding the upcoming balance sheet unwind plan.  That action, in conjunction with low inflation despite “full” employment is likely to cause the Fed to delay raising rates for a third time this year.  But if wage pressures take hold and inflation creeps upward, the Fed could possibly move in December.

As interest rates continue to hold at historic lows, the only way for rates to go is up. By hedging interest rates through the use of swaps or caps, you can lock in favorable rates today and save your business money for the long term.