Has Inflation Been Completely Tamed?

Producer Prices fell a whopping -1.3% for the m/m in September. That was the headline, which would be feeling the direct relief of lower energy prices. The core rate m/m change pushed higher up 0.6%, which I was a little surprised to see. However, the y/y rate on the core level is still at a very comfortable 1/3%. The headline rate of inflation has dropped from 3.1% y/y all the way down to 0.9%.

What inflation? The Fed is probably laughing in their seats right now. Oil keeps slipping lower, although the price has come up the past couple of days as the energy ministers try and figure out a way to continue to bilk consumers. All said, our inflation outlook from a price standpoint is well within the comfort levels of what the Federal Reserve members are targeting. I'll be curious about two things: When will the speeches start to indicate such, and will we see a confirmation from the CPI?

There is still one factor about inflation that isn't where it should be: Employee costs. These are still on the rise. Productivity hasn't really kept up with the growth in employment costs. This has been a concern that some Fed officials have voiced. I'll also be keeping an eye on that area of price growth before there is any real end to inflation.

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As for the dollar:

The knee-jerk was to buy the dollar. Not sure why as this release signals no more interest rate hikes. Then, we got the Treasury report that showed heavy flows into the U.S., where the knee-jerk was to sell the dollar. I think traders are having an identity crisis today. Let me help the "self".

Yes, this signals that there won't be a need for interest rate increases going forward. So, that would mean lower demand for dollars, right? Actually, not at all. The interest rate differential is already there. The individuals who push the currency markets around based on interest rate differentials are probably not that concerned about the U.S. interest rate situation at this point. It's fairly set for now. It's the dollar's counterparts that are the real story. If inflation is falling as it is, wouldn't that mean that there is less of a need for, say, the ECB to raise rates as well? Wouldn't that also mean that there would be less demand for euros because of that? It's not that there isn't going to be any more interest rate increases in the U.S. as much as there is a a lack of need to raise in Europe.