Headline CPI inflation below expectations, giving Fed green light for more QE

Overall CPI prices rose 0.1% in September, lower than forecasts, and the year-over-year headline CPI inflation rate held steady at 1.1%.

Core CPI prices were also below expectations, remaining unchanged in September. The year-over-year core CPI inflation rate slipped to 0.8% in September from 0.9% in August and this core measure of prices have risen just 0.7% at an annual rate over the last three months.  The Food index increased 0.3%, and the Energy index increased 0.7%. 

The longer term big picture for individual items within the CPI index is for food and energy, prices tend to be increasing.  Housing and apparrel, prices are decreasing. 

Core inflation continues to edge lower and is at a rate that is well below the range the majority of the FOMC judge to be consistent with the dual mandate of price stability and maximum employment. With the dollar falling and commodities surging, we do not expect disinflation to continue for much longer. However, the Fed’s Phillips-Curve approach to modeling inflation is likely to project even lower core inflation in 2011. Bernanke is looking to hang the case for further QE on an inflation rate that is too low. He got that with today’s CPI data and we look for the Fed to announce more QE on November 3rd.

John Ryding of RDQ supposed that they would have another round of Treasury purchases to the tune of about $500 BB.  So if you have a mortgage, rates could well be dipping some more.  

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Bureau of Labor Statistics release

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