Sparks discussion of sixth consecutive rate hike of that size in December

Durrant Pate/Contributor

The US consumer prices increased more than expected, reaching a 40-year high and putting pressure on the Federal Reserve to increase interest rates even more quickly in order to combat persistent inflation.

The overall CPI increased 0.4 per cent last month and is up 8.2 per cent from a year earlier. The largest of “many contributors” were the shelter, food, and medical care indexes.

According to the Labor Department report, prices for second hand autos and petrol also dropped.

Figures released yesterday (October 13) from the Labor Department show that, for September, the core consumer price index (CPI), which excludes food and energy, rose 6.6 per cent from a year earlier, reaching its highest level since 1982. The core CPI increased 0.6 per cent from one-month prior for a second consecutive month.

Following a strong employment report released last week, the CPI report is anticipated to confirm an extra 75-basis point interest rate hike at the Fed’s policy meeting in November and has sparked discussion of a potential sixth consecutive rate hike of that size in December.

TREASURY YIELDS SPIKING

Treasury yields spiked after US markets opened lower, and the 30-year rate briefly exceeded four per cent, the highest level since 2011. In a Bloomberg survey of analysts, the median predictions had predicted a 0.4 per cent monthly increase in the core and a 0.2 per cent increase in the total measure.

The research emphasises how the economy’s high level of inflation has eroded wages for many Americans and forced many of them to use credit cards and savings to keep up. Although the rate of consumer price inflation is anticipated to drop down in the upcoming months, market analysts say the Fed’s target will still be a long way off.

Policy makers have responded with the most aggressive tightening campaign since the 1980s but, so far, the labour market and consumer demand have remained resilient. In order to recruit and retain the workers required to meet household demand, firms have continued to raise pay in September, bringing the unemployment rate back to a five-decade low.

HOUSING COSTS GOING UP

Housing costs increased 0.7 per cent for a second month and are the largest component of services, accounting for nearly one-third of the overall CPI index.

The annual increases in shelter rent and owners’ equivalent rent were both the highest on record at 6.7 per cent. Given the time lag between real-time in rents and home prices and when those are reflected in Labor Department data, economists believe that the report’s housing components will remain elevated for a considerable amount of time.

According to Bloomberg Economics, the primary shelter components’ year-over-year rates won’t reach their top until well into the second half of next year. Even when removing rent of shelter, services inflation still rose at a record annual pace, underscoring the breadth and depth of price pressures.

In recent weeks, Fed officials have highlighted numerous times the necessity of controlling inflation, even if doing so results in higher unemployment and a recession. Many policy makers stressed in the minutes from their September meeting that “the cost of taking too little action to bring down inflation likely outweighed the risk of taking too much action”.

DETERIORATING GLOBAL OUTLOOK

The global economic outlook has deteriorated as a result of central banks’ commitment to fight inflation, both domestically and overseas. The International Monetary Fund predicts that, in the wake of the global financial crisis, economic growth will weaken to the lowest level since 2009, excluding the extraordinary falloff in 2020 caused by the coronavirus pandemic.

Prior to the midterm elections next month, inflation has also emerged as a crucial political issue, undermining President Joe Biden’s standing and jeopardising Democrats’ tenuous congressional majorities. The demand for US-made goods abroad is declining in the meanwhile due to a strong dollar.

Labor Department data released yesterday indicates that prices paid to US producers increased more than anticipated in September, driven largely by the expenses of providing services. This suggests that pricing pressure on services for consumers will continue. Food and energy producer prices also increased.