Inflation Pushes Toward Target Levels

Includes: DIA, QQQ, SPY
by: Julie Young

The Federal Reserve meets Tuesday and Wednesday to decide on monetary action plans. While bond buying and MBS purchases will likely continue to be the focus, inflation rates are beginning to push toward target levels, which could cause concern for FOMC officials.

Personal consumption expenditure is the first component that the Federal Reserve closely monitors when considering the need for monetary policy decisions. In September, PCE data released by the Commerce Department showed an increase in the August PCE Index reading of 0.4 percent while the core PCE, which excludes food and energy, increased 0.1 percent. On annual basis these figures increased 1.5 percent and 1.6 percent, respectively, which begins to near the Federal Reserve's inflation target of 2 percent. While these increases are not likely to cause changes in the federal funds rate from the Federal Reserve in October they do begin to creep on the radar. Specifically, the increase in energy prices begins to warrant greater attention.

The Bureau of Labor Statistics' Consumer Price Index shows similar data, also highlighting the rising energy prices. The most recent CPI showed an increase of 0.6 percent in September and an annual increase of 2 percent. The core CPI, excluding food and energy, rose 0.1 percent and 2 percent annually.

The gasoline portion of the Index rose 7 percent in September following a 9 percent increase in August. The 12-month annual gasoline portion of the Index increased 6.8 percent.

Price levels measured by the Producer Price Index have also been steadily increasing. In September, finished good were up 1.1 percent and 2.1 percent annually.

In the Federal Reserve's September FOMC meeting statements, the committee estimated 2012 PCE inflation to be within a range of 1.5 to 1.9 percent, with core PCE inflation of 1.6 to 2.0 percent. If inflation rates continue to trend up at their current pace through the end of the year it may cause the FOMC to change their view on federal funds rate policy adjustments, which currently plan to remain unchanged until mid-2015.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.