U.S. CPI continues to rise in October, energy prices to drive headline inflation to 2.5-3 pct over 2017

U.S. consumer price inflation continued to rise higher in October. The sequential rise in inflation came in above the consensus forecast. It rose 0.4 percent, as compared with the expectation of 0.3 percent. The increase was assisted by increasing energy costs, which were up 3.5 percent. The strong sequential rise, lifted the year-on-year inflation rate to 1.6 percent in October from 1.5 percent in September, in line with consensus expectations.

Meanwhile, core inflation came in slightly weaker than projected. It rose 0.1 percent sequentially, and 2.1 percent year-on-year. Core price growth has kept quite a stable pace in the range of 2.1 to 2.3 percent throughout this year.

Several categories contributed to the weak core inflation reading, such as recreation, medical care, personal computers and education. On the other hand, housing continues to be the main driver of inflation as the shelter component rose 0.4 percent in October, noted TD Economics in a research report.

Core inflationary pressures have been restricted to prices of service so far in 2016; however, services prices dropped to 3 percent year-on-year in October. In the meantime, core goods price, which strips energy and food, was up a modest 0.1 percent in October, continuing to stay in deflationary territory on an annual basis.

Overall, inflation remains relatively benign, but financial markets have raised their expectations for future inflation following Trump’s election victory, said TD Economics. Inflation expectations have been rising because of the anticipation that Trump will go for expansionary fiscal policy and possibly increase import tariffs.

However, energy prices would continue to push headline inflation up, even without major fiscal changes. Energy prices, as of October, are in the positive territory on an annual basis, and are likely to mainly drive the headline inflation up to 2.5 to 3 percent range over 2017, according to TD Economics.

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