CPI Shows Enough Inflation to Give Fed Cover for Rate Hike

The U.S. Department of Labor released some news on Tuesday that will give Janet Yellen and her fellow Federal Open Market Committee (FOMC) members some additional cover for an excuse to raise interest rates on Wednesday. The Consumer Price Index (CPI) will be viewed as very mixed on the actual level of inflation, but the annualized core rate is where the cover is seen.

Headline CPI was flat in November, down from 0.2% in October but matching the Bloomberg estimate of 0.0%. The annual change, meaning from November of 2014, showed a gain of 0.5% on the headline CPI, versus the prior month’s 0.2% reading.

Then there is the core CPI, which is consumer prices excluding food and energy. The monthly reading of core CPI was up 0.2% from October, matching the 0.2% expected by Bloomberg and the October reading of 0.2%.

Again, it is the annualized basis that the Federal Reserve will have some cover for a rate hike on Wednesday. November’s core CPI, excluding food and energy, was up 2.0% from the November 2014 reading, and it was up 1.9% on an annualized basis in October, versus the same a month a year earlier.
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As a reminder, the Fed wants inflation to be in the 2.0% to 2.5% range. This is a very sloppy and low-quality form of 2.0% inflation today. Commodity prices have tanked along with oil, and the strong dollar and a very weak international and weak growth markets picture only complicate things further.

Much of the existing problem is really around oil. Energy prices tend to drive the economic cost engine. After all, it takes gasoline and all forms of energy to get goods to market.

The Fed has said often late that it wants to raise interest rates. This may be a low-quality form of inflation, but they keep telling the world that they are ready to get off of zero-percent after seven years. Maybe they really meant it.