In the 12 months through August the Consumer Price Index (inflation rate) was just 0.2% (reuters). But these headlines are misleading - and they could cause the Fed to make a wrong decision tomorrow.
The core inflation rate (ex energy & food) was unchanged 1.8%. But I suppose it will rise in the coming months. The US labor market is getting tight: Weekly jobless claims are on a historical low level, the job openings are on record high (stlouisfed), the unemployment rate dropped to 5.1% (economics) and wages started to climb (marketwatch). It is highly likely that the tightening labor market will start to drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods. And we are already experiencing rapidly climbing rents and health care costs.
The headline inflation got curbed by the drop of the energy prices. Today oil is around 60% cheaper than summer last year and gasoline prices at the pump dropped about 30% (fuelgauger). But this disinflationary effect could disappear soon. In 2016 the statistics will compare the prices then with today´s prices (oil at $50 and
gasoline at $2.30). If commodity prices recover in 2006 then their advances would add onto the inflation rate.
In the moment the oil price is already climbing (plus 15% in the recent 4 weeks! CO1). A fierce oil price rally in August (plus 27% in around 5 days)
was a warning and a reminder to 2009 as low interest rates combined
with QE kickstarted a massive oil price speculation. From spring 2009 to
2012 the price of oil tripled from $40 to $120 even in weak economic
environment, financed by a supper accommodative monetary policy. According to Bloomberg the hedge
funds are already betting on climbing energy prices (bloomberg).
Tomorrow the Fed would be wise to hike her interest rates to curb the comeback of the inflation. If she responds too late to rising prices then the authority would have to respond stronger (sharper interest rate hikes to brake the inflation expectations then) which could cause a recession.