Be Careful What You Wish For—Inflation Begins to Stir

This week, the Department of Labor released its monthly report on U.S. inflation and the results showed unexpected strength. For the second month in a row, the Core (ex food and energy) rate rose to 0.3% from the prior month. This report showed the largest two-month gain since 2006. On a year-over-year basis, the rate was 2.2%. Over the past three months, the annualized rate was 2.8%.

Investors need to monitor these important data since inflation fears will dominate near term Federal Reserve policies. Hopes for dramatic rate cuts must be dampened by this inflation report as it will motivate the Fed policy makers to move more slowly in cutting interest rates. All eyes will be on the Fed’s next meeting in late September, but it is likely that any reduction will be limited to a quarter point, despite pressure from the White House for a larger decrease.