Last week we had the latest inflation readings. The Consumer Price Index was reported to be up 0.2% monthly and 2.4% annually in September. The core readings excluding food and energy were higher. The Producer Price Index was reported unchanged for the month and 1.8% annually, but again higher at the core level.  Overall, these readings were seen as further evidence that inflation continues to decline, but more slowly than expected. Why is this important even though the Federal Reserve has already started to lower interest rates?

The continued progress against inflation will determine how fast the Fed brings rates down. The Federal Reserve’s Open Market Committee meets in two weeks, and most are projecting a reversion to slower but steady rate decreases – i.e. .25% instead of 0.5%. However, if there is evidence that inflation continues to be stubborn, they could easily skip a decrease at the next meeting or at their December meeting. Thus, the news we received last week was unsettling in that regard.

Regarding how fast the Fed lowers interest rates, this could also have a direct impact upon inflation, especially in the housing market. Besides labor prices, the area of inflation which has been the most stubborn has been housing inflation. Higher interest rates make housing more expensive. Therefore, lower rates will help bring down housing inflation. However, if the housing market heats up quickly in response to lower rates, this could cause house prices to rise. Thus, the Fed has to exercise a very delicate balancing act.