October Inflation Reports

Both PPI and CPI inflation reports were released last week. PPI came in below expectations, while CPI was in line with the consensus estimate.

The chart below shows both headline and core PPI near the top of their range since 2000. Further, PPI inflation has been increasing since mid-2006. This doesn't bode well for moderating CPI inflation, if PPI leads CPI.


As expected, there was a sharp increase in YOY headline CPI inflation in October, while CPI inflation ex food and energy remained near 2.5%. In this week's Thoughts From the Frontline, John Mauldin shows YOY headline CPI inflation will remain high for the rest of 2007, due to last year's low index levels. He also describes the changes made to the CPI index in the early 1990's (substitution and hedonics).

The chart below shows two lesser-known 'core' measures of CPI inflation created by the Cleveland Fed. Both the median and trimmed-mean CPI show an increase in October. Further, Mauldin's analysis suggests we should expect these two core measure to increase in the next two months.


While the Fed doesn't have explicit inflation targets, it's believed 1-2.5% is in their comfort range for core PCE inflation. All three measures of core CPI inflation shown above are at or near 2.5%. As many have noted, this doesn't leave the Fed much room to cut thier target rate if the economy begins to slow substantially.