The latest numbers for the Consumer Price Index (CPI) were released on October 13, 2017.  The CPI rose for September by 0.5% after going up by 0.4% in August.  However, the September rise was actually less than the forecast for a 0.6% increase.

The year-over-year CPI jumped up to 2.2%.  Meanwhile, the more stable median CPI is also at 2.2% from the previous 12 months.  The median CPI increased by 0.2% for September.

One of the main reasons that consumer prices were expected to jump was because of the higher gasoline prices in the wake of the hurricanes.

Still, it is not as if these higher numbers are irrelevant.  The soaring gas prices make sense during the hurricanes and shortly after, as supplies are diverted to the hard hit areas.  But they have not fallen back to the levels seen before the hurricanes hit.  Therefore, it is a legitimate expense for most people that has increased.

If you look at the CPI just for August (0.4%) and September (0.5%), it is nearly a jump of 1% over the course of two months.  This is significant when compared to the relatively low price inflation numbers over the last several years.

In our world of finance, the markets react based on the difference between reality and expectations.  We didn’t hear any dire warnings of inflation when the forecasts were made.  But when the actual CPI numbers come in 0.1% less than expected (0.5% versus 0.6%), then all of a sudden there are questions about whether the Fed should follow through with its plans for a rate hike and a slow draining of its balance sheet.

I don’t know about the rate hike that is expected in December.  It will have some impact on the financial markets just because of investor expectations.  But overall, this rate is not that meaningful right now.  It is a reflection of the rate paid by the Fed on bank reserves.  Banks get free money (more bailouts) for simply not lending depositors’ money.

The federal funds rate is not being driven by the Fed’s balance sheet at this point.  The Fed could engage in monetary inflation or monetary deflation and it wouldn’t much impact the target rate, unless the deflation were really significant.

The bigger deal at this point is the Fed’s balance sheet.  Assuming the Fed keeps reducing its balance sheet slowly as it has stated that it will, then the void will have to be filled by investors.  I haven’t heard of any plans to reduce the annual deficit, so someone has to buy the bonds to finance it.

Investors have already been funding the deficit for the last three years since the end of QE3.  Now they will have to finance the deficits, plus an additional $10 billion per month that the Fed is draining from the monetary base.

While I don’t think Trump is going to make it to 2020 without a recession, we might still have some legs left in the mini-boom.  It is not a boom for most middle class Americans, but it is a boom for stock investors and some real estate sectors.  The high CPI numbers for August and September tell me that we may still have a little bit of boom left to go.

I expect the CPI numbers to decelerate in the coming months.  If, however, they continue to come in high, then the good times (for some) will keep on rolling for a little while longer.