Core US Inflation Rises to 40-Year High, Securing Big Fed Hike

October 13, 2022

• Prices excluding food and energy increased 6.6% from a year ago
  

• Shelter, food and medical care contribute most to broad rise
  

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

According to Labor Department figures released on Thursday, the core consumer price index—which excludes food and energy—rose 6.6% from a year earlier, reaching its highest level since 1982. The core CPI increased 0.6% from one month prior for a second consecutive month.

The overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.

The progress was widespread. The largest of “many contributors” were the shelter, food, and medical care indexes, according to the report. Prices for second hand autos and petrol dropped.

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. Additionally, traders factored in a higher peak Fed rate for 2019.

Treasury yields spiked after US markets opened lower, and the 30-year rate briefly exceeded 4%, the highest level since 2011. In a Bloomberg survey of analysts, the median predictions had predicted a 0.4% monthly increase in the core and a 0.2% increase in the total measure.

The research emphasizes 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, 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 labor 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

 

Housing costs increased 0.7% for a second month. Housing costs are the largest component of services and account 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%.

Given the time lag between real-time changes 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.

• Food costs rose 0.8% for a second month and were 11.2% higher from a year ago
• The food at employee sites and schools index rose a record 44.9% from the prior month, reflecting the expiration of some free school lunch programs
• Used car prices dropped for a third month, while new car prices continued to rise at hefty clip
• Airfares climbed. While gasoline prices subsided in September, they’ve since started climbing again
• Americans also experienced higher prices for utilities like natural gas and electricity in the month

Although the personal consumption expenditures price index (CPI), which the Fed sets its 2% inflation objective on, is a different inflation indicator from the Commerce Department, policymakers, investors, and the general public pay close attention to it. The core index is seen as a more accurate indicator of underlying inflation due to the volatility of food and energy prices.

Geopolitical factors may also contribute to high inflation. Recently, OPEC+ announced reductions in oil production, and the Biden administration’s proposed prohibition on gasoline exports could have the opposite effect, leading to increased pump prices.

While the White House is mulling a ban on Russian aluminium — a crucial component in vehicles and iPhones — in reaction to the country’s military aggression in Ukraine, the Russia-Ukraine war continues to impair supplies of commodities like wheat.

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.”

The global economic outlook has deteriorated as a result of central banks’ commitment to fight inflation, both domestically and overseas. The IMF 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 jeopardizing Democrats’ tenuous congressional majorities.

The cost of products remained constant from August, excluding energy and food. Since 1990, monthly increases in the pricing of services using less energy have been the largest. Consumer preferences are evolving, increasing services inflation and reducing demand for commodities. The demand for US-made goods abroad is declining in the meanwhile due to a strong dollar.

According to Labor Department data released on Wednesday, 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.

On Thursday, a separate report focused on how inflation is lowering employees’ purchasing power. Since April 2021, real average hourly earnings have been declining steadily. In September, they decreased by 3% from a year earlier.

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