On Tuesday, October 18, the Department of Labor is set to release its Consumer Price Index (CPI). This is the most direct measurement of inflation because it reflects what is happening at the consumer level rather than just at the producer and wholesale level.

While inflation has been tame for many years now, the reality is that we are at least starting to see some inflationary pressures building. Even if we get the argument that inflationary pressures are not building, we are seeing more and more expectations for inflationary pressure. We also noticed how the core CPI reading released in September, for an August reading, met the Fed’s most basic inflationary target.

As a reminder, the Federal Reserve wants to get the U.S. economy up to its target of 2.0% to 2.5% inflation. That level, along with a full employment economy of today, will help to justify all of the Fed presidents’ jawboning about the need to hike interest rates.

As far as what to expect, Reuters is calling for a headline CPI gain of 0.3% on the monthly reading and 1.5% on the annual reading. Then there is the core CPI, ex-food and energy, where Reuters seen a monthly gain of 0.2% for the month and a 2.3% gain for the year.

Bloomberg is calling for a 0.3% gain on the monthly headline reading and a 0.2% monthly gain on the core CPI reading. Dow Jones is also calling for a 0.3% gain on the monthly headline reading and a 0.2% monthly gain on the core CPI reading.

Again, what will probably matter the most for the Fed is the annualized reading. If inflation is running closer to 1% then hiking rates is harder to do. If inflation is close to 2.0%, or even higher (even at just the core CPI reading), then they will have more justification to hike interest rates in December.

As far as why there may be some increased expectations for inflation, they are numerous. 24/7 Wall St. has covered some of these (with links) and we have seen other comments elsewhere.

• The Empire Manufacturing Index was weak on Monday, but it showed heating pressures in prices. That’s more like stagflation, but price pressure is price pressure.
• Last week brought numerous Fed presidents talking up the desire to hike and how inflation expectations were there. Even the FOMC minutes showed an itchy trigger finger.
• Retail sales even made a slight recovery in September.
• Producer Price Index (for Final Demand) showed increased price pressures continuing.
• There was also a gain in import and export prices.

Another consideration is not just how data-dependent the Fed will be ahead. They have toned that data-dependent rhetoric down a bit more of late. We saw last week that the monthly Merrill Lynch RIC Report even warned about higher inflation expectations ahead.

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