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CPI and Federal Reserve Action Hold the Key 

Spokane Regional Business Barometer – Q3, 2014

Year-to-year for third quarter, the CPI rose from 1.19 to 1.57, but was down slightly from 1.9% for second quarter 2014.

“The CPI should now continue to moderate through year-end and into next year,” says Shaun O’L. Higgins, Managing Principal of The Oxalis Group LLC, “with an annual rate of about 1.4 to 1.5%.”

“One thing that is going to help keep prices suppressed is the sharp decline in energy prices,” says Avista Chief Economist Grant Forsyth. “Oil prices will get passed through too many commodities, not just gas at the pump.”

Forsyth continues, “In the developed world, we are in this very low inflationary environment, even though the central banks have a pretty aggressive monetary policy. In fact, we are back in a situation where Japan and Europe are more at risk of deflation than inflation. As long as U.S. inflation stays in the same range we’ve been seeing, Federal Reserve Chair Janet Yellen has the room to extend low short-term interest rates beyond mid-2015, even though most economists thought these rates would start to increase in mid-2015.”

“Going forward, we need to be careful making the assumption that inflation will definitely be trending downward due to the strength of the dollar and lower import prices,” says Steve Scranton, Chief Investment Officer for Washington Trust Bank. “Almost 40% of the CPI is housing related. For the past five years it’s been difficult to raise rents because of vacancy rates, which are coming down. If we start to see significant increases in rent prices, that could offset lower energy prices and we could still see the CPI staying in the 1.7 to 1.8% range. This may be a surprise to people who don’t realize the CPI is so heavily dominated by real estate.”

Q3_CPI_Table

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