This U.S. consumer prices increased as expected in November, largely due to an increase in energy prices, but there are underlying inflation trends that are cause for concern. CPI, or the consumer price index, is a measure of prices paid by consumers. The U.S. Commerce Department reported that the CPI rose 0.4% in November from a month earlier.
However, the core CPI, less energy and food prices, rose lower than expected at a 0.1% increase. This can be attributed to the most significant drop in apparel prices in decades and low healthcare costs. The annual increase in core CPI slowed from 1.8% to 1.7%. Core CPI is considered an important metric because food and energy prices are more volatile. It excludes the price of goods that are affected by commodity traders and better reflects the over-all buying power of consumers.
What caused the Core CPI drop?
Apparel prices dropped an incredible 1.3%. The last time apparel prices showed a drop as substantial was in 1998. Economists speculate that an unseasonably warm winter resulted in higher purchases of discounted summer clothes and less purchases of bigger ticket winter clothing. Additionally, increasing competition from online retailers may have contributed to lower prices.
Why is this significant for future monetary policy?
Inflation is a significant factor for the fed’s fiscal policy. Sluggish price increases could dissuade further interest rate hikes in 2018. The critical question is whether policymakers believe that tax-cuts will be enough to boost the economy and warrant additional rate hikes. Raising interest rates without corresponding inflation would be a risk.
On Wednesday afternoon, the Federal Reserve raised interest rates a quarter of a point. The benchmark federal funds rate increased to 1.25 to 1.5 percent. This is the third increase in this key rate this year. Forcasts indicate rates will continue to increase 3 times in 2018.