From the article, it is evident that the consumer prices in U.S market fell unexpectedly last month. This unexpected fall in prices has been attributed to the declining gasoline prices and the strength of the dollar which has had noticeable effects on the cost of other goods. The increased prices could lead to unexpected levels of inflation and the Federal Reserve has the obligation of ensuring that the desired levels of unemployment and inflation are always maintained. Maintaining desirable levels of inflation requires inclusive monetary policies such as change in interest rates among others. It is wise noting that hiking interest rates is not the best option since it may lead to undesirable consequences. This leaves the Federal Reserve in a dilemma on the best course of action to take with an objective of taming the escalating inflation level.

As aforementioned, the levels of inflation and unemployment have some relation. With this in mind, Labor Department is also concerned with the consumer price index which is also in a tremendous decline. With such concerns in the labor market, the Federal Reserve is contemplating raising interest rates for the first time in a decade. Before such policies are reached at, it is paramount for the policy makers to have an analysis of the consumer spending, housing and levels of unemployment. From the article, it is evident that essential data is in support of hiking interest rates. Although there has been an increase in borrowing costs, the current financial market turmoil guarantees a hike in the interest rates. From experts’ point of view, it is prudent for the policy makers to hike interest rates immediately to solve the impending level of inflation.

Although there are some risks associated with hiking interest rates such as increase in global debt crisis, the Federal Reserve find it paramount to hike the interest rates.  The hiking of interest rates is justified by the fact that even with low interest rates, the stocks were trading higher and the dollar fell substantially among other currencies. Though there are also high job openings, there has been unemployment rate of 5.1% with undesirable wage growth.

Despite use of interest rates in taming inflation, it is also prudent to be wary of cost of essential commodities and cost of imported goods. From the article, food and energy costs increased by 0.1 percent in previous month and also reflected the dollar’s impact on the cost of imported goods. The strength of the American currency as compared to her trading partners has been critical to consumer price index (CPI). The article asserts that the CPI has increased by 1.8% for the last 12 months which is a clear indication that a strong dollar plays a significant role in dampening inflation.

The article emphasizes on the importance of tracking personal consumption expenditure price index with exception of food and energy. The levels of inflation could be even more devastating if food and energy prices are on a tremendous rise. For instance, the gasoline prices had risen for three straight months. The food prices also increased by 0.2% which is a clear indication of the alarming rate of inflation in the country. Though there are is a decline in the airline fares and price of used cars, the decline does not justify Federal Reserve not to hike interest rates. In essence, hiking interest rates may have devastating effects but Fed officials have no option if they have to contain the alarming rate of inflation in U.S.

Reference

http://www.dailyfinance.com/2015/09/16/consumer-prices-fall-august/#!slide=976160

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