Solid figures show US still on course for December rate hike

Jake Cordell
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Federal Reserve building
The US Federal Reserve is set to raise rates after the US Presidential Election (Source: Getty)

The US Federal Reserve is still on course to hike rates by the end of the year after a reassuringly uneventful set of economic data out this afternoon.

New numbers showed retail sales jumped by 0.6 per cent in September, bouncing back from a 0.2 per cent fall the month before. On an annual basis, consumer shopping continued to tick over at a healthy pace, up by 2.7 per cent compared to a year ago.

Steady demand will reassure Janet Yellen and her fellow rate-setters on the Federal Open Market Committee (FOMC) that the world's largest economy should hold up in the run-up to the US Presidential Election.

"Janet Yellen has arguably been fed with all the ammunition needed to raise rates this year and today’s strong US retail sales figure could bring her another step closer to pulling the trigger," said Paul Sirani, chief market analyst at Xtrade.

Minutes from the September meeting of the FOMC published earlier this week showed it was a "close call" as to whether to raise rates, but markets are now putting the prospect of a raise before the end of the year at around 66 per cent.

Costs for US manufacturers also rose faster than economists' had expected in September, in another sign inflation could be creeping back towards the Fed's official two per cent target.

The producer prices' index (PPI), which measures inflation for businesses' input costs was 0.3 per cent in September, up from zero in August and ahead of predictions. Core PPI, which strips out the most volatile costs in things like fuel, rose from one per cent to 1.2 per cent.

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Rising costs for firms could eventually be passed on to consumers in the form of higher prices in the shops - boosting the headline consumer prices index (CPI) which is watched by central banks. Higher inflation typically leads to higher interest rates as central banks act to keep price rises in check by dampening demand.

However, Paul Ashworth at Capital Economics noted the strength in retail sales was largely driven by car and fuel sales. He said: "The stagnation in underlying sales through the quarter is a clear illustration that consumption growth will be weaker. This isn’t enough to prevent the Fed from raising interest rates in December, but it is a disconcerting trend."

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