The Breakdown:

At this point, it shouldn’t come as any surprise that inflation is still hot. Last week, the Consumer Price Index (CPI) doubled expectations, increasing by 0.4% in September, while annually we saw a decrease of 0.1%. This annual decrease in overall inflation looks great but when we strip out the volatile food and energy prices, the Core CPI reveals not only an increase for September but an annual increase as well.

You may be asking, “why is it important to strip out food and energy prices when those seem to be affecting me the most?” The reason we look to Core Inflation is that food and energy prices fluctuate based on trading and their dependence on each other. WallStreet Mojo provides a perfect example of their volatility. “Commodities traders may bid for petroleum prices in anticipation of impending war or calamity to sell them on the next day for profits. Consequently, the oil prices rise, and if their anticipated war or calamity fails to happen, they sell all their oil bids lowering the oil price.”

While we don’t focus too much on energy prices for the inflation reading, it is interesting to note that gas prices declined almost 5% in September but were up over 18% from last year. Rent, food, and medical services also contributed.

Producer Price Inflation (PPI) was also higher than expected, but both Headline and Core PPI both resulted in an annual decline. While there was a decline, it was insignificant. Elevated PPI likely results in higher CPI because the producers pass on higher costs to consumers rather than reducing their margins.

In addition to higher prices for consumer products, inflation directly affects the Housing market. Mortgages, like any fixed investment, see higher interest rates when inflation rises because inflation eats into the buying power of the investment. In response, investors drive up interest rates to offset the decrease in their buying power.

While the numbers look ominous, there is hope! Inflation is based on an annual reading, meaning that each month, the new reading takes the place of that month’s reading from the previous year. Given that last year’s readings were very high, lower readings in the next few months could result in a lower annual inflation rate.

Next week, we’ll be reviewing some important Housing data as the National Association of Home Builders will release its Housing Market Index. In addition, Housing Starts, Building Permits, and Existing Home Sales data for September will be released this week. Stay tuned for the breakdown.