September Inflation: What to Expect

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In recent months, traders and investors have closely followed inflation numbers to determine whether the old villain of the U.S. economy is here to stay, forcing the Federal Reserve to roll back its accommodative monetary policy.

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ICE Inflation Measure

ICE is the Federal Reserve’s most favorable inflation measure, as it tries to determine whether inflation is transitory or permanent.

As the term suggests, ICE measures future inflation, based on consumer inflation expectations for the year ahead. According to modern economic theory, rising consumer expectations indicate that inflation could accelerate in the year ahead, while declining expectations suggest inflation will taper off. Households and firms take into consideration the expected inflation when they make decisions like negotiating employment contracts or lending out money.

In August, ICI rose 5.2%. That was the 10th consecutive rise, fueled by gains in food, rent, medical care, and gas prices. These gains were partially offset by decreases in the expected price of college education.

For September, markets expect ICI to edge slightly higher, to 5.3%.

CPI Inflation Measure

CPI measures present consumer inflation at the retail level. In August, CPI increased at an annual rate of 5.3%. That was slightly better than the 5.4% in June and July, and the smallest gain in seven months, thanks to the moderation in the price hikes of used cars and trucks, steady shelter and apparel price hikes, and declines in airfare prices.

For September, markets expect CPI to remain at 5.3%.

PPI Inflation Measure

PPI measures current inflation at the wholesale or producer level, where the first-place supply chain bottlenecks enter the pricing equation.

In August, PPI increased at an annual rate of 8.3%, the highest reading since at least November of 2010. That’s thanks to a rise in the index for final demand; prices for final demand services rose 0.7%. Likewise, the index for final demand goods moved up 1.0%.

For September, markets expect PPI to edge higher, to 8.5%.

Bottom Line

In short, inflation is expected to remain elevated by all three measures, especially by the PPI, the first index to capture the impact of supply chain bottlenecks on commodity prices. However, there could always be surprises in store.

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