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Core U.S. Inflation Hits 40-Year High, Securing Large Fed Rate Increase

In September, a closely watched measure of US consumer prices rose more than expected to a 40-year high, putting pressure on the Federal Reserve to raise interest rates even more aggressively to combat persistent inflation.

According to Labor Department data released Thursday, the core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982. For the second month in a row, the core CPI increased by 0.6% from the previous month.

The overall CPI rose 0.4% last month and was up 8.2% year on year. The progress was widespread. The shelter, food, and medical care indexes were the largest of “many contributors,” according to the report. Gasoline and used car prices have fallen.

Following a strong jobs report last week, the inflation data is likely to cement another 75-basis-point interest rate hike at the Fed’s November policy meeting and has fueled speculation for a fifth consecutive increase of that size in December. Traders also anticipated a higher peak Fed rate next year.

US stocks opened lower, while Treasury yields rose, briefly reaching 4%, the highest level since 2011. A Bloomberg survey of economists predicted a 0.4% monthly increase in the core and a 0.2% increase in the overall measure.

The report emphasizes how high inflation has spread throughout the economy, eroding paychecks and forcing many Americans to rely on savings and credit cards to keep up. While consumer price growth is expected to slow in the coming months, the Fed’s target will be reached gradually.

Policymakers have responded with the most aggressive tightening campaign since the 1980s, but the labor market and consumer demand have proven resilient thus far. In September, the unemployment rate fell to a five-decade low, and businesses continue to raise pay to attract and retain the workers needed to meet household demand.

The CPI report is the final one before the US midterm elections next month, and it poses new challenges to President Joe Biden and Democrats as they seek to maintain their slim congressional majorities. Already, the rise in inflation has put those prospects in jeopardy.

Housing Prices

Shelter costs increased 0.7% for the second month in a row, accounting for nearly a third of the overall CPI index. The annual increase in shelter rent and owners’ equivalent rent was 6.7%, the highest on record.

Given the lag between real-time changes in rents and home prices and when they are reflected in Labor Department data, economists believe the housing components of the report will remain elevated for some time. According to Bloomberg Economics, year-over-year rates for the major shelter components will not peak until well into the second half of next year.

Even after adjusting for rent and shelter, services inflation rose at a record annual rate, highlighting the breadth and depth of price pressures.

  • Food prices increased 0.8% for the second month in a row and were 11.2% higher year on year.
  • The food at employee sites and schools index increased 44.9% from the previous month, reflecting the end of some free school lunch programs.
  • Used car prices fell for the third month in a row, while new car prices continued to rise at a rapid pace.
  • Airfares increased. While gasoline prices fell in September, they have since begun to rise again.
  • During the month, Americans also paid more for utilities such as natural gas and electricity.

While the Fed bases its 2% target on a separate Commerce Department inflation measure — the personal consumption expenditures price index — the CPI is closely watched by policymakers, traders, and the general public. Because of the volatility of food and energy prices, the core index is thought to be a more reliable indicator of underlying inflation.

Geopolitical developments may also keep inflation high. OPEC+ recently announced oil production cuts, and the Biden administration’s potential gasoline export ban could result in higher pump prices.

The Russia-Ukraine conflict continues to disrupt commodity supplies such as wheat, and the White House is considering a ban on Russian aluminum — a key component in automobiles and iPhones — in response to the country’s military escalation in Ukraine.

According to Bloomberg Economics…

“What’s really at stake in the September CPI is the December FOMC meeting, and the news isn’t good: the higher-than-expected CPI print will make it difficult for the Fed to slow down to a 50-basis-point hike at its final meeting of the year, as it indicated in the most recent dot plot.”

-Anna Wong and Andrew Husby, economists

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