Low inflation raises hopes ahead of Fed minutes

The US stock market has nudged higher today, boosted by inflation figures that suggest the Fed has plenty of scope to persist with stimulus.

By early afternoon in New York, the Dow was trading up 0.09% or 14 points at 15,981, while the broader S&P 500 index was up 0.13% at 1790.2.

We had two significant pieces of US macroeconomic data released earlier, with inflation data from the US Labor Department and retails sales figures from the Commerce Department.

The Consumer Price Index fell 0.1% month-on-month in October, following September’s rise of 0.2%. The core CPI (that is, excluding food and energy) rose 0.1%. Year-on-year this leaves the core rate up a seasonally-adjusted 1.7%, with the headline rate up just 0.9%.

This is hugely below the Fed’s 2% target rate, meaning that, at the very least, the central bank has plenty of latitude to continue with stimulus should they so choose. I would go further than that, in fact, to say that if they are committed to achieving the 2% target, they may be compelled to maintain stimulus in order to attempt to try and bring that rate up. The Fed has acknowledged that below-target inflation may pose a threat to economic growth but, putting today’s report into context, the Fed is concerned with the bigger picture and ultimately the decision will be influenced more by their long-term expectations for inflation.

Retail signs showed signs of life, with a 0.4% rise in October (0.3% for core sales, excluding automobiles and petrol). This augurs well for fourth-quarter GDP, and shows that upbeat reports from Home Depot and Macy’s are part of a larger trend.

The minutes from the last Fed meeting are published at 7pm GMT.

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