Inflation pressures in America remained muted last month, according to a new report from the Bureau of Labor Statistics (BLS). Specifically, the consumer price index (CPI) for all urban consumers was essentially unchanged in September (+0.02 percent), the smallest monthly increase since January. Even core CPI, which excludes the volatile food and energy components, increased by just 0.1 percent last month, half the gain analysts expected. A separate gauge released by the Labor Department earlier this week revealed that wholesale price pressures were even weaker in September, with the producer price index declining by 0.3 percent, the largest month-over-month drop since 2015. Although tepid inflation may prove to be transitory, especially as the labor market continues to tighten, the current environment is encouragingly providing many Americans with some of the best real wage growth in years.
This has helped sustain consumer spending, by far the biggest driver of the record-long economic expansion. Muted price pressures also give the Federal Reserve cover to act (cut rates) early to stave off a more severe slowdown that could result from an escalating trade war or some other shock. A separate issue worth mentioning is that even though the above figures imply that overall inflation eased last month, the consumer price index for urban wage earners and clerical workers (CPI-W) actually rose in September. That is good news for the nearly 69 million Americans who receive Social Security benefits or Supplemental Security Income payments because the CPI-W is used to determine their annual cost of living adjustments (COLAs). Immediately after the release of the September CPI data the Social Security Administration officially announced that the next COLA will be 1.6 percent, in line with our initial forecast. For younger Americans it is worth reiterating that long-term participation in a tax-advantaged 401(k) retirement plan and other savings vehicles can help limit their old-age dependence on the government (Social Security), and in turn lower their financial sensitivity to annual COLAs.
Sources: Econoday, U.S. DoL, U.S. SSA, FRBSL