Where Is US Inflation Heading In The Next 5 Years? – 5 Experts Weigh In

Where Is US Inflation Heading In The Next 5 Years? – 5 Experts Weigh In

The general consensus amongst economists is that US inflation is low. This was corroborated by favorable reports by the Department of Labor at the beginning of May. Yet, what trajectory will inflation take in the next half-decade? In this article, 5 experts weigh in on where US inflation is heading in the next 5 years.

The Fed Does Not Expect Inflation To Rise Significantly

“Inflation management is one of the primary roles of the Federal Reserve, so you can look to them for indications of inflation expectations.

The Fed will raise interest rates when it expects inflation to get above the 2% target. By raising interest rates, the Fed makes borrowing less attractive so spending and inflation will fall. Most recently, the Fed has announced that they do not plan to raise interest rates through 2021. This means that they do not expect inflation to rise significantly.

The Fed has also said they expect for unemployment to increase slightly. Again, this indicates low inflation. If less people are employed, then less people will have money to spend and create that upward pressure on prices that causes inflation.”

Brandon Renfro, Professor, Financial Planner

Not Much Organic Inflation

“Speaking as a consumer I do not believe there will be much ‘organic inflation’ in the next five years. A lot of people never fully recovered from the Great Recession. They’re saving a little bit more and do not fully trust the recovery. In addition the baby boomers are all approaching retirement age and will be living on fixed incomes. Healthcare costs are a major concern. According to statistics the economy is booming and yet a lot of people do not feel that is the case in their personal life.

Many people are working in Gig Economy jobs, which are in essence temporary assignments with no health benefits. Examples include driving for Uber, Lyft, Grub Hub, Door Dash, or Amazon delivery. These are not the type of positions, which fueled the economy in past generations.

Inflation is generally caused by consumers pumping a lot of money into the economy and taking on large amounts of debt. The wounds of the Great Recession have yet to heal. People are not automatically assuming they will be better off a year from now. Whenever one feels uncertain about the future they are reluctant to spend lavishly. Any spending they do is usually measured.

Having said that world affairs such as tariff wars and instability in the Middle East could cause inflation without any assistance from consumers. A major rise in oil costs could ripple through the economy causing prices to rise in other sectors of the economy. However, fear has a way of causing people to spend even less which leads to higher unemployment and recession. That would eliminate any inflation bubble.

We’re not likely to see any real inflation until the average working person believes the backbone of the economy is solid with good paying jobs. Right now adults are taking jobs from teenagers such as delivering newspapers, cutting lawns, snow removal, and working in fast food restaurants. This explains why there is a sudden push to make the minimum wage $15. We may not see historically high inflation for another 10 years!”

Kevin Darné, Author, Continuing Education Instructor

Rates Must Creep Back Up To Historic Levels

“Where’s US inflation heading in the next 5 years? – This is impossible to pin down precisely, but I believe that short of a recession, rates must creep back up to historic levels.

In spite of trade wars, government shutdowns and the resultant delay in statistics, the business cycle goes on. That said, corporations have used all the cost-cutting tricks in the world. Now is the time for increasing prices on the ground level as well as at the Fed Open Market Committee.

Complicating matters is that persistently low inflation and low rates hamstring the options that central banks have historically used to address crises. Again, in order to relieve this psychological pressure rates and inflation must creep up.”

Robin Lee Allen, Managing Partner, Esperance PE

A Modest Stagnation Of Growth Rates Can Be Expected

“Considering the latest development in trade and monetary policy, it can be expected that the U.S. inflation rate will remain at modest levels.

Given the uncertain outcome of the ongoing trade war, as well as highly leveraged corporate debt levels, which weigh on the outlook of the world economy, a modest stagnation of growth rates can be expected.

Another point to consider is the Fed’s shift in interest rate expectations. The expected monetary easing is an indication of concerns about low growth and geopolitical tensions.

Since the conundrum about the missing effect of the last quantitative easing programs still prevails, especially the question why full employment did not yield to higher inflation, it remains at least questionable if another round of quantitative easing would lead to higher inflation. The Federal Reserve Bank of St. Louis 5-Year Forward Inflation Expectation Rate (T5YIFR) dropped in the last year from 2.16% to 1.94% and from 2.47% to 1.94% within the last 5 years, even though the Fed deployed massive quantitative easing programs.”

Dr. Stephan Unger, Assistant Professor of Economics, Saint Anselm College

A Recession Within The Next 5 Years

“I predict inflation will stay around 2% for the next 3 years unless a recession hits sooner in which case I think the government will print more money and drive up inflation at a drastic rate. I think there will be a
recession within the next 5 years, so when that hits inflation may be as high as 10% in just one year.”

Stacy Caprio, Financial Blogger, Fiscal Nerd

Given economic indicators, the Fed has projected that there will be no real threat of skyrocketing inflation in the coming years. However, there are numerous variables that can shift which would alter that forecast. Ultimately, only time will provide the definitive answer.


Investing During Inflation And Deflation – What Do Investors Need To Know?

Investing During Inflation And Deflation – What Do Investors Need To Know?

Inflation and deflation can have a significant impact on the performance of a portfolio. It is crucial for investors to understand investment strategies to weather these two economic factors. In this article, experts provide valuable tips and insight into what investors need to know when investing during inflation and deflation.

Avoid Having High Cash Balances

“A top rule for investing during inflation is to avoid having high cash balances. Since money loses it’s purchasing power during such phases, investors should aim at investing into assets which are immune against devaluation, such as physical goods, e.g. gold, silver, other commodities, real estates, etc.

But also an investment into stocks would be good advice since stock prices tend to increase in times of inflation. The reason is that investors flee out of cash and are looking for any types of investment.

In times of deflation, investors should consider to hold cash and to invest in bonds, especially long-term bonds, since interest rates are likely to decline and therefore bond prices.”

Stephan Unger, assistant professor of economics, Saint Anselm College

Utilize The Power Of Diversification

(Credit: Richmond Quantitative Advisors)

“The above illustration details global asset classes that tend to outperform during rising inflation and falling inflation. You can further delineate if the economy is in a declining stage or growth stage to provide four full quadrants of global asset performance.

The four quadrants include:

* Inflation with Growth – Inflationary Boom

* Inflation with declining Growth – Inflationary Stagnation

* Deflation with Growth – Deflationary Boom

* Deflation with declining Growth – Deflationary Bust

Based on the illustration, there are ways to position one’s portfolio for certain environments the US encounters. The main focus for investors should be to utilize the only free lunch in investing which is the power of diversification. By diversifying across assets within these four quadrants, one has the highest likelihood of weathering the storm (even if it is not clear where it may occur across the quadrants). Investors need to know those asset classes that have the ability to outperform in each quadrant and then assess their personal asset allocation decisions accordingly.”

Andrew S. Holpe, Managing Member, Richmond Quantitative Advisors

Investors Need To Generate After-Tax Returns

“Most people create investment portfolios to invest their assets to outpace the rate of inflation. The financial markets and governments prefer an environment with low, controllable inflation growth. These conditions allow for expansion while enabling governments to repay current debt with future-value currency.

According to Morningstar, a consensus of financial analysts predict that long-term inflation will grow at 2.48% per annum. Simply put, an investor needs to generate an after-tax return above this inflation rate to stand still and protect the purchasing power of their money.

The most prudent way to ensure success is to build a highly diversified portfolio of stocks, bonds, real estate, commodities, and cash-like liquidity. Limit your single-name stock concentration per issue to not more than 5%. Construct a bond portfolio focusing on credit-quality and that the current yield of your bond portfolio exceeds the effective duration of your portfolio. Effective duration is the sensitivity to a change in interest rates. The combination of these factors allow for growth and provide additional protection during a recession and deflationary environments.

During deflationary environments, consumers defer purchases because they expect lower prices in the future. That reality convinces more people that prices are falling and induces more deferral of purchases, etc. This virulent feedback loop is difficult to change and often requires extraordinary policy measures by central banks. During the credit crisis, the Federal Reserve (FED), Bank of Japan (BOJ) and the European Central Bank (ECB) all implemented radical policy measures to fight deflation. A flight to safety…underweight stocks, overweight cash, foreign exchange (FX), insured CDs, and sovereign bonds are prudent positioning during deflation of asset values. Your cash is worth more in terms of purchasing power as time goes on so there is some inherent return to cash even if there is little or no interest income.”

Paul Bowers, Managing Director, Compass Family Offices

Invest in Commodities And Real Estate

“Typically, assets that an investor would invest during inflationary times would be hard assets such as commodities and real estate. Commodities would include energy such as oil and gas as well as industrial and precious metals (not necessarily gold), You would NOT want to invest in bonds since interest rates rise during inflation and would result in declining bond prices. Many investment advisors recommend gold but I view it as more of a crisis manager rather than an inflationary hedge. In fact, one could argue that gold might be better used as a hedge during deflationary times since deflation tends to occur in a rapidly deteriorating economy when investors flock to protect their assets.

Stocks tend not to do well in deflationary environments. One reason often provided is that revenue and earnings are under duress as prices decline, which would eventually translate into lower stock prices.”

Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners

Two Sides Of The Same Coin

“Economic factors such as inflation and deflation have a direct bearing to investors’ portfolio. Both are two sides of the same coin. Inflation is the rate at which general prices for goods or services are increasing while deflation is the decline in prices.

Investors need to know how these two factors can affect their investment portfolio. In certain situations, both inflation and deflation can occur at the same time, and this poses a more difficult prospect of protecting your investment. But whether it’s deflation or inflation, there are steps you can take to avert this threat.

If it’s inflation, investors can use the stock market to protect their portfolio. Normally, rising prices are good for equities. International bonds can also provide a solution in this case. Investors can buy international bonds in countries that are not experiencing inflation and hence reduce the impact of razing inflation.

In times of deflation, the most appropriate way to deal with it is to acquire high-quality bonds rather than stocks. Bonds tend to perform well during these times. Government-issued bonds and foreign bonds provide excellent options.”

Edith Muthoni, Chief Editor,

Investments Need To Beat The Rate Of Inflation

“It’s important to consider your real rate of return when you expect inflationary markets. Your investments need to beat the rate of inflation in order to make any real progress.  If inflation is 8%, you need to make at least 8% on your investments just to break even. If your investments only earn 5% during an 8% inflation period, your real rate of return is roughly -3%. You made money, but not enough to keep up.

There are ways to invest specifically in anticipation of inflation. The simplest is to invest more aggressively in stocks. Since equity investments do better over longer horizons they are often a good inflation hedge. One drawback though is you do need to plan to hold the stocks for a long time. Since stocks tend to be more volatile, you’ll need to plan for a longer investment term. In the short-term, your stock values could fall.

A direct way to invest for inflation is to purchase securities that have explicit inflation terms. The most common of these is the Treasury Inflation Protected Security, or TIPS. These are government bonds whose par value, and therefore interest you receive, adjusts with changes in the consumer price index. You can get these in terms as short as five years.

Another way to invest for inflation is to buy rental real estate. The reason rental real estate is an inflation hedge is because of the rent payments. You can adjust those for inflation when your tenant’s lease expires. If your terms on an annual basis, you would be able to make the adjustment every year.”

Brandon Renfro, Professor, Financial Planner

Regardless of the economic climate, a diversified portfolio is essential. Diversification is crucial when factoring both periods of inflation and deflation. When making investment decisions, take into account these expert tips and always do your due diligence.

8 Inflation-Proof Investments to Hedge Against the Dollar Devaluation and Inflation Risk

8 Inflation-Proof Investments to Hedge Against the Dollar Devaluation and Inflation Risk

More and more investors are growing alarmed at what they see as the steady attack on the value and stability of the dollar. Between rising annual federal deficits and the over $21 trillion total U.S. federal debt time bomb, the future of the dollar and dependably low inflation is no longer a sure and certain ultimate outcome. This is why sensible investors are hedging their portfolios against both dollar devaluation and risks of significantly higher inflation. Here we look at seven solid choices to accomplish both of these goals.

Gold and Silver Bullion

It often comes as a shock to many investors to learn that studies on investments outperforming inflation show gold only outpaces the inflation genie some 54 percent of the time. This is not a fair result though. In cases where hyperinflation or substantial currency devaluation becomes the order of the day, gold (and silver too) massively outdoes inflation. In environments with high and continuous inflation, you need a prolonged depth of exposure to gold.

The surest way to reliably own gold is in the physical bullion form of it. The key is to obtain and store it in the least expensive way possible. What you need when you opt for this most secure form of gold and silver are the most broadly minted, traded, and liquid forms of bullion. This means that your top choices should nearly always be American Eagles, Canadian Maple Leafs, Vienna Philharmonics, or the British Britannia. All are popular, easy to sell in nearly all countries around the world, and come with low premiums (and discounts) over spot bullion prices.

When you are looking to make some of the smartest investments in gold, you should seriously consider a Gold IRA. It is critically important to use a reputable Gold IRA company. These three companies will steer you in the right direction and help you to pick out the best tax-advantaged gold purchases possible for your situation.

Gold and Silver ETFs

Some people are more concerned about low entry and exit fees, highest liquidity, instant saleability, and split-second diversification. In these cases, Gold and Silver ETFs may be your best option for hedging against devaluing dollars and inflation. The truth about these various ETFs is that not all of them were created equal.

The best performing ETFs are those that are most closely correlated to the underlying price of gold. The least desirable ETFs have baskets of gold miner stocks, which consistently do not closely match up in performance to the underlying price of gold (or silver). Individual gold company stocks introduce a variety of risks to the equation, such as possible corporate quarterly losses, financial bankruptcy potential, and strikes at or seizure of mines and other valuable assets around the globe. All of these risks can lead to a wide divergence between the performance of gold and the price of a Gold ETF made up of gold mining stocks.

Analysts generally recommend one of two Gold ETFs that deliver the goods. These are the SPDR Gold Trust ETF trading under the appropriate symbol of GLD and the ETF iShares Gold Trust trading as IAU. These two ETFs are not dealing in any shady derivatives or even futures contracts on the underlying metals. They actually purchase the appropriate physical quantities of their commodities to match the trading price of underlying gold (and silver) as precisely and safely as possible. Since the two funds own their physical gold outright, their performances nearly mirror gold and silver price movements. The two companies boast nearly the same risk to return profiles and ratios. Their ten year betas amount to .47 and .49 respectively.


As inflation rises and accelerates, commodities’ prices tend to rise apace. This makes them an ideal protection from the inflationary effects. There are not that many assets which gain from higher inflation, especially inflation that is unexpected. Commodities are a notable exception. As demand for services and goods rise, this typically pushes the costs of the services and goods higher, along with their underlying commodities prices for those goods utilized within them. It is the commodities futures markets that serve the role as ongoing clearing houses and auction markets for latest supply and demand information.

One thing to keep in mind with commodities is that they remain among the most volatile asset classes on the markets. They do provide higher returns in inflationary and devaluation environments, but this comes at the cost of a higher risk (in the form of standard deviation) than with standard equity investments (stocks). The key in most cases is to include commodities in an asset portfolio that is already significantly less volatile. This would decrease the all around risk to portfolio from negative correlation while often boosting the overall anticipated return.

Investing in commodities futures requires a great deal of background, some expertise, and ultimately nerves of steel. Generally only accredited or sophisticated investors meet the tests of this harder form of investing. Mutual funds provide a more suitable means of getting involved in them for the majority of investors. Alternatively, natural resources funds purchase firms that are involved with the production or mining of commodities. There are also raw commodities funds that buy into derivatives based upon commodities and back them up with fixed income investments.

The key is to be careful that you are not simply buying into mutual funds full of resource producing companies, which does not give you the real diversification you are seeking away from equities. Two solid ideas for direct commodity investments are the PIMCO Commodity Real Return Strategy Fund and the Oppenheimer Real Assets Fund that trades based upon the GSCI commodities index. There are also a range of new ETFs using the commodities indices as their underlying instruments which will be launched in the future or are imminent to be launched.

Remember that commodities have beaten inflation in an impressive 66 percent of instances. This is especially the case with the iShares S&P GSCI Commodity Index Trust.


The newest way to hedge against inflation and especially against dollar devaluation is using the cryptocurrencies like Bitcoin and Ethereum. The cryptos are a technologically cutting edged way for retaining your purchasing power. They have become particularly popular in two jurisdictions: ones with astronomical or runaway inflation like Venezuela and Argentina, and those that have capital controls like North Korea, South Africa, and China. In countries such as these with prolonged bleak outlooks, cryptocurrencies are an idea that could not come along soon enough.

This is especially the case because cryptocurrency wallets provide 24 hours per day, 7 days per week access to this electronic form of money that knows no borders. Back in Cyprus in 2013, the Cypriot Central Bank announced 100 euros per day ATM withdrawal limits. Greece went harsher with 60 euros per day in 2015. No matter how great your personal savings may have been, without access to your funds, it is irrelevant. You could lie helpless in a hospital room unable to be discharged for not paying a bill as you can not gain access to your own money.

The dawn of cryptocurrencies changed this. Citizens of crisis-stricken national economies finally found a credible and viable means of escaping from their national borders that had served as financial prisons. Farmers in Cuba may not be able to pack up and leave, nor factory workers in Iran or North Korea, but thanks to cryptocurrencies they can at least rest easy knowing that their money is continuously stored outside of the reach of their country’s central bank and regulatory agencies.

Real Estate

In this case, we use Real Estate to speak specifically about vehicles for holding commercial properties. This one of a kind investment class is both a hard asset that holds its intrinsic value well in inflationary and devaluation periods as well as an income-producing asset in the form of office spaces being leased out to tenants. The income-producing element pays out regularly in the form of dividends to the investors. This is why real estate has a long-term historical appeal to investors who are seeking a credible means of hedging their holdings against prolonged periods and bouts of inflation.

Real Estate equity and real estate investment trusts beat out inflation in an impressive 69 to 71 percent of real-world scenarios. Gaining a well-diversified exposure to such real estate with a reasonable expense ratio is imminently possible even for smaller retail investors, thanks to the Vanguard REIT ETF. For a comparable mortgage property residential REIT, you might opt for the Market Vectors Mortgage REIT Income ETF.

Barclays Aggregate Bond Index

Bonds may not be a vehicle that most investors think of for beating out inflation and currency devaluation, but their track record is impressive. A great barometer of this category is the bell weather Barclays Aggregate Bond Index. It beats out inflation in an impressive 75 percent of cases. You can track the index with an investment in the iShares Core U.S. Aggregate Bond ETF.


Americans have a unique Treasury option in the TIPS. These are Treasury Inflation Protected Securities. Specifically indexed to the American CPI inflation index, these Treasury instruments provide a way to protect your portfolio from inflation and its ravages. TIPS are so effective that they outperform inflation in 80 percent of scenarios. It makes the TIPS the leading out-performing category of investments.

You have three different Exchange Traded Funds to choose from to get involved in these TIPS on a highly liquid scale. Two of them track the Barclays U.S. Treasury Inflation Protected Securities Index. The third follows the iBoxx Three Year Target Duration TIPS Index.

Leveraged Loans

A non-traditional investment that fares very well in periods of inflation is the category of leveraged loans. They provide low duration risk as well as a lower correlation to investment grade bonds.

There are other advantages to leveraged loans, such as comparatively attractive yields, improved diversification, lesser volatility versus equities, and the possibility of producing powerful risk-adjusted returns. Thanks to improved credit conditions, defaults should remain under average for the leveraged loan market for the foreseeable future at least.

These leveraged loans outperform inflation in an incredible 79 percent of cases. A way to invest in them with safety and liquidity is through the PowerShares Senior Loan ETF.

In Conclusion

There is no good reason to be a prisoner of either excessive inflation or ruinous currency devaluation. Thanks to these seven credible inflation busting investments, you can both realize gains and sleep easier at night, knowing that your portfolio is effectively hedged. The additional advantage of gaining more effective and comprehensive diversification is only additional icing on your investment cake.

Annual Inflation Peaks in November

This morning, the Bureau of Labor Statistics released consumer inflation numbers for November. The Consumer Price Index for all Urban Consumers (CPI-U) was unchanged for the month following seasonal adjustments. This is what most analysts had expected. As the chart below illustrates, net inflation since July remains flat. November saw declines in energy and food costs offset by higher prices for shelter and medical care services. For the 12-months ending in November, the headline index rose an unadjusted 0.5%, the highest annual inflation number since 2014.

monthly CPI Nov

Excluding food and energy, seasonally adjusted core prices rose 0.2% in November, which was also what most analysts had forecast. Adjusted core prices have increased by 0.2% for three months in a row and have stayed between 0.1% and 0.3% throughout 2015. For the year ending in November, core inflation was 2%.

Core vs ALL

These numbers point to underlying inflationary pressure and support the Federal Reserve’s highly anticipated rate hike, which will likely be announced tomorrow following their meeting. The Fed has kept interest rates at 0.25% since 2009.

November’s Inflation

Overall, seasonally adjusted prices were flat in November as declines in the indexes for food and energy were offset by higher prices for shelter, transportation services and medical services. The index for all items less food and energy climbed a seasonally adjusted 0.2% in November, in line with expectations. The more volatile food and energy indexes were down 0.1% and 1.3% respectively, after seasonal adjustments.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

All Items0-
Fuel Oil (non seasonally adjusted)-6.5-
Utilities (piped gas service)-0.61.0-
Energy Services-
All Items Less Food and Energy0.
Services Less Energy Services0.
Transportation Services0.
Medical Care Services0.

The monthly decline in the food index is its first drop in 8 months. The index for food at home fell 0.3% in November. Aside from fruits and vegetables, which were 0.6% higher for the month, every other component of the index for food at home fell. Prices for meat, fish, poultry and dairy products continue to decline.  However, the adjusted index for food away from home climbed 0.2% in November.

The decline in the energy index resulted from lower gas prices, down a seasonally adjusted 2.4% in November. Gas prices have been very volatile in 2015, falling over 18% in January and climbing over 10% in May. Shelter costs continue to rise steadily, up 0.2% in November following increases of 0.3% in September and October. Prices are also rising steadily in the service sectors, up 0.3% for the third month in a row. Transportation and medical care services were up 0.6% and 0.4% respectively.

Annual Inflation

For the 12-months ending in November, unadjusted prices were up 0.5% overall. The increase in overall price levels was largely driven by higher shelter costs, which account for 33.2% of the overall index. Unadjusted shelter costs were 3.2% higher over the 12-month period. The index for rental costs (primary residence) climbed 3.6% during the year, while moving expenses were 7.1% higher.

Food prices, which account for about 14% of the overall index, were up 1.3% for the year ending in November. The index for food at home, which is about 60% of the overall food index was only up 0.3% year over year. This marks its smallest annual increase in over 5 years. The prices for meat, fish, poultry and eggs are all down year over year while the prices for bread, fruits and vegetables are higher.  The index for food away from home climbed 2.7%. A significant hike (4.9%) in the index for food at employee sites and schools was the primary reason for higher costs for food away from home.

The energy index makes up approximately 7.4% of the CPI-U and about half of the energy index is energy commodities and the other half energy services. For the year ending in November, the overall energy index fell 14.7% including a 24.2% decline in energy commodities and a 2.8% decline in energy services. Among the energy commodities, the index for fuel oil had the largest decline, down 31.4% for the year. Over the same 12-months, the index for gasoline (all types) fell 24.1%.


It is highly expected that the Federal Reserve will raise interest rates by a quarter of a percentage point on Wednesday. According to the Wall Street Journal, 97% of economists surveyed expect the fed to raise rates this week. This would be the first rate hike in nearly a decade as the economy and employment appear to finally be returning to solid ground.

What remains largely an unknown at this point is the pace of future rate hikes. This will largely be a function of inflation expectations.  With overall inflation continuing to lag well below the Fed’s target, the pace of future rate hikes may likely be slow. According to David Jones, chief economist at DMJ Advisors:

The stronger dollar and falling oil prices [may] have masked some underlying inflation[ary] pressures which could surface quickly as we move closer to full employment.”

Fed Funds Rate

October Inflation in Line With Expectations

The BLS released October’s inflation data this morning and there were no major surprises. The Consumer Price Index for All Urban Consumers (CPI-U) climbed  a seasonally adjusted 0.2% in October following a decline of 0.2% in September. This is in line with consensus expectations. Year over year, the CPI-U was up 0.2% at the end of October, which is well below the Fed’s annual inflation target rate of 2%. According to a recent Federal Reserve press release:

“Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.”

Core inflation, which excludes food and energy, increased 0.2% in October, following a 0.2% increase in September. For the year ending in October, core inflation was 1.9%. Outside of the volatile energy index, which was down over 17% for the 12-months ending in October, consumer prices appear to be climbing at a steady pace only marginally below the Fed’s target.

October’s Seasonally Adjusted Inflation

October’s 0.2% climb in consumer prices was largely driven by modest increases in the energy index, which rose 0.3% following a decline of 4.7% in September. Gas prices were up 0.4% in October compared to a 9% decline in September (this still leaves gas prices down 27.8% year over year).

A 0.8% spike in the index for medical care services also helped drive October’s inflation. This includes a significant jump in the hospital services index, up 2% in October. Overall, medical care costs posted a 0.7% gain in October including a 2.3% jump in the costs of inpatient services and a 1.7% rise in the costs of outpatient services.

Four of the six major grocery store food groups saw prices rise in October. The overall food index rose a modest 0.1%, following a 0.4% rise in September. The price of fruits and vegetables climbed 0.5% in October, while the index for meat, poultry, fish and eggs fell by the same amount, despite a 3.4% increase in the cost of bacon and bacon related products. A fall of 4.8% in the price of eggs was particularly notable for the month. Breakfast cereal and butter posted strong price gains, rising 2.4% and 5.3% in October.

Shelter costs continued to climb steadily, up 0.3% in October, matching Septembers change.  Shelter costs have risen between 0.2% and 0.4% every month this year. The index for lodging away from home, up 0.8% in October, contributed significantly to higher shelter costs, .

The apparel index was down 0.8% in October. There was a large amount of variation within the index. The index for boys apparel climbed 2.9% while the index for girls apparel fell by 2.9%. Delivery services also fell in October, down 2%.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

All Items0-
Fuel Oil (non seasonally adjusted)-6.5-
Utilities (piped gas service)-0.61.0-
Energy Services-
All Items Less Food and Energy0.
Services Less Energy Services0.
Transportation Services0.
Medical Care Services0.

12-Month Inflation

For the 12-months ending in October, unadjusted inflation was 0.2%. This includes a 27.8% decline in the index for energy commodities, which accounts for roughly 3.8% of the total CPI-U. The overall energy index fell 17.1% for the year. Despite the strong negative impact of energy prices, the CPI-U is marginally higher for the year.

Food prices, which account for over 14% of the overall price index, were up 1.6% year over year. Annual changes in food prices were mixed. Eggs were 30% more expensive than they were one year earlier. Over the same period, milk became 7.5% cheaper and the index for salt and seasoning rose 7.0%. Food at employee sites and schools was 5% higher for the year.

The prices of many consumer goods became cheaper over the year. The indexes for apparel and for appliances posted 1.9% and 4% declines respectively. The price of a television set has fallen 13.3% year over year, while the index for toys was down 6%. On the other hand, the cost of shelter rose 3.2% for the year with moving costs up 6.4%.

Outlook for the Fed

Most economists expect the Fed to raise interest rates in December, which would be the first rate hike in over 9 years. Today’s inflation release should not have a significant impact on these expectations. Fed fund futures are pricing in a 73.6% likelihood of a 0.25% rate hike on December 16th, which would bring the Fed Funds rate to 0.5%. The level of uncertainty around this highly anticipated hike and the pace of tightening over the coming years is unprecedented.

The modest but steady growth in the U.S. economy is in stark contrast to slowdowns in much of the world. With the EU considering quantitative easing and Japan dipping into recession, international money is flowing into the U.S. economy, driving the dollar higher. A rate hike would put further upward pressure on the U.S. dollar, which would create a slowdown in domestic manufacturing. It would also make imports cheaper, potentially keeping inflation from moving towards the target rate. The graph below shows the U.S. dollar reaching its highest level in 10 years versus a basket of international currencies. This should be a major concern at the next FOMC meeting on December 15th and 16th.

Screen Shot 2015-11-17 at 8.49.13 AM

Annual Inflation Flat as Consumer Prices Decline in September

Falling gas prices kept inflation below zero for the  month of August. The BLS announced this morning that the Consumer Price Index for All Urban Consumers (CPI-U) fell 0.2% in September on a seasonally adjusted basis; this is in line with expectations. In August, the CPI-U fell 0.1% following 6 straight months of growth. Gas prices also drove the decline in August’s CPI-U number. September’s decline wiped out the annual gains of 0.2% that were posted at the end of August, leaving the CPI-U flat for the year ending in September.

Screen Shot 2015-10-15 at 8.36.20 AM

The index for all items less food and energy was up 0.2% in September, following increases of 0.1% in both July and August. For the 12-months ending in September, this core index increased 1.9%, pointing to more robust underlying growth for the U.S. economy. This is the highest annual core inflation number since July 2014. As the graph above shows, the disparity between overall consumer prices and consumer prices less food and energy continues to grow.

Energy Prices

The decline in overall consumer prices in September was largely driven by falling gasoline prices, which were down a seasonally adjusted 9% in the month alone.  Over the same period, the energy index fell 4.7%, adding to August’s 2% decline. The energy index accounts for about 8% of the CPI-U and gasoline about 4%.

Volatile gasoline and energy prices have driven overall price levels and kept inflation very low over the past year. The energy index is down 9.7% for the year ending in September. Over this period, the biggest price declines were seen in the price of gasoline and fuel oil, down 18% and 18.6% respectively.

Seasonally Adjusted Monthly Numbers

On a seasonally adjusted basis, the CPI fell 0.2% in September following a decline of 0.1% in August.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

All Items0-
Fuel Oil (non seasonally adjusted)-6.5-
Utilities (piped gas service)-0.61.0-
Energy Services-
All Items Less Food and Energy0.
Services Less Energy Services0.
Transportation Services0.
Medical Care Services0.

The price of food climbed 0.4% in September, adding to August’s 0.2% increase in the food index. Higher prices for dairy and fruits and vegetables, including a 4.7% spike in the price of lettuce, were somewhat offset by declines in the prices for fish and poultry. The index that measures the price of food in primary and secondary schools was 7.2% higher in September alone.

The shelter index continues to climb, up 0.3% in September, following increases of between 0.2% and 0.4% per month since the beginning of the year. In September, higher shelter costs were the result of higher prices for hotels and lodging away from home. The rent index, which is part of the shelter index, climbed 0.4% in September. Shelter costs account for about one third of the CPI-U.

The medical care index was up 0.2% in September, including increases of 0.3% for medical care services and 0.6% for health insurance. At the same time, the costs for both prescription drugs and medical equipment and supplies were down 0.2%.

Following four months of declines, the index for household furnishings and operations increased 0.4% in September despite a fall of 0.7% in the price of floor coverings. Indoor plants and flowers were significantly more expensive, gaining 2.4% in September.

The index for apparel fell 0.3% in September, following two months of gains. September’s apparel number masks volatility within the index. On a seasonally adjusted basis, the prices for men’s outerwear fell 3.9% and girl’s apparel was down 3.7%. At the same time, the price of men’s sweaters climbed 8.7%.

Annual Inflation

September’s declining CPI-U wiped out any 12-month gains, leaving overall price levels flat for the year. Higher prices for most components of the index were just able to balance the 12-month 18.4% decline in energy prices. The food index was 1.6% higher for the 12-month period and Shelter costs climbed 3.7%. Transportation services were 2.2% higher, including increases of over 5% for both car and truck rentals and vehicle insurance. Significant 12-month price hikes were also posted for animal services including veterinary services (up 4.3%), admission to sporting events (up 7.8%) and childcare and nursery school fees (up 4.2%). In general, higher prices were recorded for most services. Financial service costs were nearly 4% higher for the year, including an increase of 5.1% for tax and accounting services.

Price declines over the past year include the cost of cell phone services (down 3.8%) and the index for cell phone hardware, calculators and consumer information items, which tumbled 15.8%. Airline fares were down 6% for the year as was the price of toys. Television sets became over 13% less expensive compared to a year earlier and the price of appliances in general fell 3.5%.

Economic Outlook

Today’s inflation numbers will be watched closely as the Federal Reserve appears divided over the possibility of an interest rate hike later in the year. Stronger inflation numbers would have suggested that the economy was more robust and ready for higher interest rates. However, today’s weak inflation data, although expected, add to a series of disappointing indicators.

The Producer Price Index, a principal gauge of inflation in the manufacturing sector, declined by 0.5% in September, its weakest number in 7 months. September retails sales were also a disappointment, missing expectations at 0.1% versus the expected 0.2%. Core retail sales slipped 0.3% below the expected decline of 0.1%. The U.S. dollar has also been falling due to a disappointing jobs report in September.

The next Federal Open Market Committee meeting is October 27-28. The markets have been pricing in approximately a 39% chance of a rate hike in December. However, this number has been declining following downturns in global and emerging markets. Today’s CPI-U numbers will not reverse the trend. Rates are likely to remain unchanged until at least March of next year.