Prices continued their breakneck pace in September, with major inflation indicators rising at their fastest pace in 40 years. That’s bad news for the Federal Reserve, which is struggling to keep the cost of living down.
Overall inflation rose 8.2% in the year to September, slowing slightly from August but better than economists expected, according to Thursday’s latest consumer price index report.
More worrisome is that the underlying inflation trend is headed in the wrong direction. Prices were up 6.6% in the year to September after stripping fuel and food that were volatile and removed to better understand the trajectory. This was the fastest since 1982.
Inflation has been rapid for the past year and a half, and despite the Fed’s most aggressive campaign in generations to slow the economy and keep inflation in check. Proven to be stubborn. Rapid inflation has also triggered the highest Social Security cost-of-living adjustment in decades — a move announced Thursday is an 8.7 percent increase in benefits for retired Americans with disabilities.
Central banks are rapidly raising interest rates from near zero to a range of 3-3.25%, and investors expect four consecutive three-quarter percentage point hikes at the Fed’s next meeting, which ends Nov. 2. I hope.Inflation data, they started betting On another big move at the central bank’s December meeting.
“This trend is very troubling,” said Brelina Urchi, a U.S. economist at T. Rowe Price.
Markets rocked after the report, with stocks initially falling sharply but then rising sharply as investors struggled to make sense of what the data meant for the future. The S&P 500 Index closed his 2.6% gain.
Fed rate hikes are already slowing the housing market and will slowly affect the rest of the economy as it becomes more expensive to borrow money for large purchases and business expansion. But it will take time before consumer demand cracks. Jobs are plentiful and wages are rising, so Americans are still spending.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
This allows companies to continue charging more. Lingering supply chain issues related to pandemic-era shutdowns have left some goods in short supply, labor shortages are pushing up wages, and many businesses are raising prices more than necessary to cover costs. increase. Lose shoppers.
Inflation is also a stumbling block for President Biden and his fellow Democrats ahead of the midterm elections. Thursday’s report was the final CPI release before the Nov. 8 election, and Republicans wasted little time blaming Mr. Biden for his handling of the economy. While Americans continue to consume, many of the country’s most vulnerable people are struggling with rising costs of food, fuel and housing, and most people see their salaries falling due to rising costs. I can see you there.
Mr. Biden said the report showed “some progress” in dealing with price increases, noting that costs had risen less in the past three months than in the previous three. But he also acknowledged that inflation remains painfully high.
“There is more work to be done,” he said in a post-release statement.
Economists expect the economy to slow and inflation to ease in the coming months. But they’ve expected a cooldown to be imminent over the past 18 months, and the data has repeatedly proven them wrong. Concerned that rapid inflation will continue, his Fed officials have unveiled plans to raise interest rates to a point that constrains the economy and keep them high until inflation clearly eases. I’m here.official estimated We plan to increase the cost of borrowing to around 4.6% by the end of 2023.
After three unusually large rate hikes, officials had hinted at discussing a slowdown in November. New inflation data raises the possibility of another big move, and economists say it could be difficult for the Fed to slow down by the end of the year, as policymakers had previously predicted. says.
“It’s hard to see how they build their claim to slowing down in December,” Uruci said.
It’s too early to tell how the Fed’s thinking will change before its final meeting of the year on December 13th and 14th. Not only are interest rates rising, but they are also being affected by monetary policy adjustments taking place around the world.
But for now, nearly all the indications they’re getting from inflation data are disappointing.
Fed policy will take time to work, and most economists don’t expect this year’s correction to cut inflation significantly. However, as interest rate movements work by slowing consumer demand, one might expect their impact to first appear in the category of everyday consumer goods and services. It hasn’t happened yet. From restaurant meals to cigarettes to stationery, prices continue to climb, indicating that consumers are still willing to pay.
And periods of price spikes are nasty. Overall inflation has been above 5% for the full year, well above the central bank’s target. The Federal Reserve is targeting 2% annual inflation on average. Personal consumption expenditure A major not released until late October.
As prices continue to rise sharply, central banks worry that consumers and businesses will get used to it. As such, workers may begin to demand larger pay increases to cover rising costs, and employers may make large and regular price adjustments a routine part of their operations. Rapid inflation will become a more permanent feature of the US economy, making it even harder. Punch out.
consumer inflation expectations I’m still not too upset with the survey. But economists said there were signs in the inflation data themselves that price gains may be more entrenched.
Understanding Inflation and How It Affects You
Housing costs, which account for a large portion of inflation, are rising steadily. Service industries such as pets and dental care have recorded significant price increases. This could be a sign that a tight job market is pushing up wages, which in turn pushes prices up as businesses try to cover labor costs.
“We’re starting to see sustained inflation creeping into the economy,” said Steve Rick, chief economist at CUNA Mutual Group. I am really concerned that it will become difficult to bring down inflation.”
Wages are not rising fast enough to keep up with inflation, but they are rising much faster than usual. Average hourly wages for general workers rose 5.8% in his year to September.those wage increases hovered 2% or 3% in the decade leading up to the pandemic.
It’s not just an increase in service costs. Grocery bills rose across the board in September as prices for fruits, vegetables and bakery products rose. Prices of apples increased by 5%, lettuce by 6.8% and wheat flour by 2%.
Forces that economists had expected to keep inflation in check — such as the recent recovery in tangled supply chains — will take time to show up in the data. For example, the report predicted a significant drop in used car prices, but fell only about half of what was expected. New car prices and auto parts continue to rise rapidly as these industry turmoils linger.
As a result, commodity prices, which were expected to dampen inflation, neither added nor subtracted from the September data. Gasoline prices have weighed on overall inflation, but the outlook is bleak as fuel prices have recovered over the past month. Gas could switch from pulling inflation to pushing it up by the next data release.
These details show how thorny inflation is for the Fed, and how difficult it is to solve.
Federal Reserve policy works by making it more expensive to borrow money. As shoppers withdraw and the cost of financing expansion increases, businesses should hire less, the labor market weakens and wage growth slows. That will help slow down demand.
This cycle will take time to run, but the Fed cannot afford to wait in an environment where inflation could reaccelerate rapidly, so officials will push policy aggressively without waiting for results. I have adjusted. Doing so increases the risk that the central bank will trigger a severe recession that will put many people out of work. That would especially hit low-income workers, who are at high risk of unemployment and already bearing the brunt of inflation.
“They have no choice but to try to avoid inflation,” said Mohamed El-Erian, chief economic adviser at Allianz. He said the Fed was late in diagnosing inflation and reacting to it too late, and he believes the economy will pay the price for the central bank’s slow response.
“This is self-harm and will affect the most vulnerable members of our society the most,” El-Erian said.
Joe Rennison, Anna Swanson When Tara Siegel Bernard contributed to the report.