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The Fed remains perplexed about the lack of inflation, but data expected this week and even in the next couple of months is unlikely to provide a reliable picture.
The Fed, in the minutes from its last meeting, indicated it could raise interest rates again this year, as expected by the market, but the puzzling lack of inflation was a concern to "many participants" who fear that it may not be just the result of temporary factors.
That puts the spotlight on the consumer price index, released Friday, but that September number is likely to be distorted by the impact of hurricanes, as it was in August. Producer price inflation is released Thursday, but the market views CPI as the more important measure.
"The markets have picked up a little of this patience and 'wait to see' more inflation data. I don't think there is much to talk about there," said Rick Rieder, global chief investment officer, fixed income at BlackRock.
"As long as inflation is within a reasonable range, financial conditions have become much more important," Rieder said. "I think the CPI report Friday is important but even that, if it is in a range the Fed has laid out a plan. They're going to raise rates in December, and they're going to go three times next year."
The Fed minutes said "many participants" thought another increase in the fed funds target range was warranted if the outlook remains "broadly unchanged." While several Fed officials have publicly questioned another rate hike, analysts said the Fed minutes did not change the view that the Fed will hike rates in December.
"There's definitely going to be focus on inflation data in the coming months, and I think these other Fed officials that seem to be against raising rates in December really want to see some more signs that inflation is going to reach their 2 percent target," said Charlie Ripley, senior investment strategist, Allianz Investment Management. "It's difficult to see in the muddy waters right now."
The consumer price index, released Friday, is likely to show another month of unusual gains due to the impact of hurricanes. CPI is expected to rise 0.6 percent on the headline, as fuel and other costs rose after Hurricane Harvey in late August and Hurricane Irma in September.
"They're befuddled with inflation. They're leaning towards [hiking]," said Ward McCarthy, chief financial economist at Jefferies. "The hawks are going to say, look, we have inflation, and the doves are going to say it's not going to last ...The question is how long is that going to persist and that's probably not going to be settled by December."
However, the Fed also said some members note "that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding."