Entrenched Inflation Increases Pressure on Fed
Core inflation, excluding food and energy, jumped to a 40-year high of 6.6% in September from a year ago.
Inflation is spreading deeper into the U.S. economy, slamming the door on hopes that the Federal Reserve will dial back interest-rate hikes that threaten to tip the country—and perhaps the world—into recession.
Core inflation, excluding food and energy, jumped to a 40-year high of 6.6 percent in September from a year ago, outpacing forecasts and triggering a slide in U.S. bond markets as investors bet that the Fed will be forced into two more 75 basis point (bps) increases this year.
That spells trouble for a U.S. economy that’s already been slowing down, as soaring prices eat into paychecks while higher borrowing costs crush the housing market. Thursday’s inflation report showed how broad price pressures are, with big jumps in the cost of food, shelter, and medical services.
“There is no way the Federal Reserve can contemplate a ‘pivot’ this year,” Stephen Innes, a managing partner at SPI Asset Management, said in a report. “The second-round effects of inflation are clearly being felt across the economy.”
U.S. stocks declined after the data’s release but later bounced back. Treasury yields pulled back but remained higher on the day, and a key measure of mortgage rates soared to a 20-year high just shy of 7 percent.
Overall consumer-price inflation was 8.2 percent in September, staying above 8 percent for a seventh straight month, according to the Bureau of Labor Statistics. Food costs were up more than 11 percent from a year earlier, offsetting a drop in gasoline prices, and rents continued to climb.
Biden Feels the Heat
Another month of surging prices is the last thing President Joe Biden wants to see right now.
As he campaigns to keep hold of slim congressional majorities in midterm elections that are less than four weeks away, Biden has been been holding out hope that the pandemic price spike will soon fade away—even as he warns Americans that they might face a “slight recession.”
September’s consumer-price numbers, and the Fed’s likely reaction, will only intensify that risk. Biden and his economic team said Thursday that there are signs of progress in the data, and charged that a Republican takeover of Congress would push costs even higher.
What Bloomberg Economists Say…
“What’s really at play in the September CPI is the December FOMC meeting, and the news is not good: The higher-than-expected CPI print will make it difficult for the Fed to slow down to a 50 bps hike at its last meeting of the year, as it indicated in the latest dot plot that it wants to do.”
—Anna Wong & Andrew Husby, economists
The persistence of American inflation is equally bad news for the rest of the world, which is increasingly feeling the pinch from the Fed’s battle to rein in prices.
The rapid climb in U.S. rates—the Fed has already taken its benchmark to 3.25 percent, from near-zero as recently as March—has pushed the dollar to a two-decade high and forced other central banks to keep up or risk further devaluation. “Everyone has to follow” is how Josep Borrell, the European Union’s top diplomat, put it.
That synchronized tightening of policy across countries threatens to push the global economy into a slump in 2023, the World Bank warns. Developing nations that borrowed in dollars are especially vulnerable, and many are already in a debt crisis.
International Monetary Fund (IMF) chief Kristalina Georgieva, who’s hosting the world’s top policymakers at the lender’s annual meeting in Washington this week, said Thursday that the Fed has little choice but to keep fighting inflation aggressively. She warned that the world will face a stronger dollar as a result.
Barclays Plc economists lifted their Fed call for December and February to 75 and 50 bps respectively, and added that the central bank will have to reverse course by cutting rates at the end of next year.
In the United States, the greenback’s surge—along with strong household finances, bolstered by pandemic stimulus—have given the economy a cushion against the fastest Fed rate hikes since the 1980s. Labor markets and consumer demand have proven resilient. Unemployment returned to a five-decade low in September, and businesses are still raising pay.
All of that has kept alive hopes of the fabled “soft landing”—a slowdown that doesn’t tip into a slump. But even by the Fed’s own admission, the risk of doing too little to ground inflation likely outweighs the cost of doing too much.
“With still very strong inflation readings, the Fed is now clearly forced to err on the side of overdoing at the cost of hurting the economy,” said UniCredit economist Edoardo Campanella.
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