Inflation Picked Up

The latest CPI report for October gives support to that prediction as we saw core CPI accelerate for the first time since January as you can see in the chart below. The CPI increased 0.1% month over month and 2% year over year. Core CPI was up 0.2% month over month and 1.8% year over year which beat estimates by 0.1%. The inflation rate is getting closer to the Fed’s goals even while it starts to unwind the balance sheet. This supports the already obvious point that the Fed will raise rates in December. The housing cost index was up 0.3%. Wireless phone service was up. That was an aspect which Yellen has complaining about for the past few months. The 1% decline in energy hurt inflation. With the recent oil price increase, the chance of energy prices increasing in next month’s report are high. As I have said, there’s slack in the inflation metric where a few tenths of a percent increase isn’t bad. The issue will be if the inflation rate starts to get out of control in 2018. That would be the beginning of the end of the business cycle and cause a selloff in tech stocks. It could be the story of 2018.

Update On The Fed

We’ve been trying to get a reading on how the market will react to the unwind of the balance sheet ever since the Fed started this new policy. However, the process has started so slowly, there’s not much to analyze. The chart below gives an updated view of the balance sheet. It still isn’t even at the lowest point of 2017. The decline from 2015 to 2017 was sharper than the decline this year. We will need to wait until 2018, to get a better reading on what will happen to the markets. As I mentioned, the Fed is about to raise rates in 3 weeks. There’s a 91.5% chance of 1 hike and an 8.5% chance of 2 hikes. I doubt Yellen would hike rates an extra 25 basis points just as she is about to leave. It will be up to Powell in 2018 to push rates up further. Given how close the Fed is to its long term expectation for rates, I think 2018 or 2019 could be the last year of hikes.