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Slowly Rising Core Inflation Suggests Improving Economy

UncleSamThere were some promising signs for the economy within today’s Labor Department report on the Consumer Price Index, said Robert Hughes, senior research fellow at the American Institute for Economic Research. Even though overall inflation for the month was unchanged, core areas of the economy are slowly picking up strength, Hughes said.

Consumer demand is getting stronger, which allows sellers to raise prices, he said. As pricing power firms up, sellers tend to get more confident, he said. “They can raise prices without fear of losing their customers,” he said.

The total CPI was unchanged in October, as a sharp decline in energy prices offset modest gains elsewhere. That’s after a 0.1 percent increase in September. Over the last year, prices have increased 1.7 percent.

Some sectors of the economy are experiencing sustained price increases including housing, hospital services, pharmaceuticals and education while other areas are just starting to see faster price increases. “That says to me the economy is getting a little bit stronger,” Hughes said.

But slow wage growth, very mild improvements in productivity, a strengthening dollar and a weak global economy have helped keep price increases at bay.

Food prices increased 0.2 percent while energy prices fell 1.9 percent. Hughes said that the Federal Reserve can use monetary policy to affect most sectors of the U.S. economy, but food and energy are often subject to forces beyond its control, like the weather and global politics and events. So other factors tend to be weighed when determining the health of the economy, he said.

Hughes said the Fed will have plenty of leeway in taking a slow approach to tightening monetary policy, which is likely to be good for U.S. stock and bond markets, he said.

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