Final demand rebounded much stronger than expected driving inflation risk higher.

The third quarter ended on a stronger note than expected. Retail sales increased by 0.7% for the month of September. This was much better than expected, and August was revised up to a +0.9%. The quarter started with a decline of 1.6% in July. The rebound was not a function of volatile auto sales, as total sales were up 0.8% excluding auto and auto parts in September. The control group component, which is used to compute PCE in the GDP report, was also up 0.8% for the month. Some of this strength was a function of inflation since sales are not adjusted for price increases. It simply costs more to buy the unit volume of goods and services. The inflation data for the month was up more than expected with a huge difference between retail and wholesale data.