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US September CPI report showed a weaker-than-expected increase of only 0.1% down from the 0.2% increase in August and expectations that today’s report would match the 0.2% gain, explains Paul Ferley, Assistant Chief Economist at RBC Capital Markets.

Key Quotes

“Energy prices dropped 0.5% with food and beverage prices rising 0.1%. Those were generally in line with expectations. The downward surprise was concentrated in the core, or ex food and energy, measure which rose 0.1%.”

“The annual increase in core inflation held steady at 2.2% which helped ease concern about the inflationary consequences of an economy operating beyond capacity given the report last week that the September unemployment rate dropped further to 3.7% and thus further away from the Fed’s view of equilibrium unemployment being in a range of 4.3% to 4.6%.”

“Our expectation is that today’s report will not prevent the Fed from tightening further but will keep the pace gradual.”

“Our forecast assumes that the upper end of the Fed’s target range rises from a current 2.25% to 2.50% the end of this year and to 3.50% by the end of 2019.”