On October 25, the U. S. Bureau of Labor Statistics issued its inflation report for September. This report was delayed by nearly two weeks because of the shutdown.
Overall inflation increased from 2.9% in August to 3.0% in September
Core inflation decreased from 3.1% in August to 3.0% in September.
Why two different inflation rates?
The overall inflation rate takes into account everything that the Bureau of Labor Statistics tracks. It is a good indication of the cost of living because it reflects overall consumer prices.
The core inflation rate excludes volatile price changes, as those for food and energy. While those items are important to the consumers, they are excluded because they are prone to large, short-term fluctuations. By omitting food and energy, the core inflation rate provides more accurate information about the long-term inflation trend.
Because of its long-term stability, the core inflation rate is the preferred rate used by the Federal Reserve System when formulating interest rate policy.
This year’s history of inflation rates
| MONTH | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP |
| OVERALL
INFLATION |
3.0 | 2.8 | 2.4 | 2.3 | 2.4 | 2.7 | 2.7 | 2.9 | 3.0 |
| CORE
INFLATION |
3.3 | 3.1 | 2.8 | 2.8 | 2.8 | 2.9 | 3.1 | 3.1 | 3.0 |
Source: Bureau of Labor Statistics
Likely reaction by the Federal Reserve System (Fed)
It is no secret that the Fed’s Chairman, Jerome Powell, has been at odds with President Trump regarding interest rates. The president has wanted lower rates to stimulate the economy; Mr. Powell has resisted because inflation is still far above the Fed’s target of 2.0%. Reducing interest rates tend to increase economic activity, but also tend to fuel inflation. Higher interest rates has the opposite effect.
At the last meeting of the Fed, interest rates were lowered, mainly because consistently weak job market reports have indicated a major weakness in the overall economy.
It appears that the consensus among observers of the economy is that the Fed will lower interest rates again at their meeting in November or December, or both.
This is because of the reduction in the core inflation rate in September and a still-weak jobs situation.
If the Fed does in fact reduce interest rates, consumers are likely to be affected, how and to what degree will depend on their current economic position. Here are some examples.
Consumer Loan Rates
I most households, the most significant consumer loan is their home mortgage. Those contemplating buying a home will greatly benefit from a rate reduction. Following the last Fed’s rate reduction there has been a reduction in mortgage rates. According to Freddie Mac, the average interest rate on 30-year mortgages has been declining. These were the rates on specific days:
August 28, 6.56% September 11, 6.35% October 23, 6.19%
This has stimulated activity in the real estate market. According to the National Association of Realtors, sales of existing homes in September were 1.5% higher than in August.
Rates on savings
Those people who have recently renewed CD’s and similar instruments have experienced substantial reduction in the Annual Percentage Yield available to them. This trend will continue if the Fed reduces interest rates further.
Economic Activity
Lower interest rates make it easier for companies to borrow money to expand, creating more jobs. This creates a domino effect, commonly known as trickle-down economics. New jobs cause more people to have money to spend, thus increasing demand for goods and services, which leads to further business expansion.
Stock Market
All major stock indices have been showing gains since the Fed’s last rate reduction. This is what has been happening with the three major indices in the last month:
| INDEX | ONE-MONTH GAIN |
| DOW JONES INDUSTRIAL |
2.76% |
| S&P 500 | 3.18% |
| NASDAQ COMPOSITE | 4.40% |
Stocks are risky and there are no guarantees, but when the return on fixed instruments declines, people are more likely to take the risks associated with variable assets and direct more of their assets toward stocks. This causes stock prices to rise. This is why Wall Street favors lower interest rates.
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