US core inflation rises to 40-year high, secures Fed big boost

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A closely watched measure of U.S. consumer prices rose more than forecast to a 40-year high in September, pressuring the Federal Reserve to raise interest rates further to quell inflation. persistent development.

The core consumer price index, which excludes food and energy, rose 6.6% from a year ago, its highest level since 1982, Labor Department data showed on Thursday. From a month earlier, core CPI rose 0.6% in the second month.

Overall CPI rose 0.4% last month and rose 8.2% from a year earlier.

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Advances are based on a wide range. The report said the shelter, food and health care indexes were the largest of the “multiple contributors”. Gasoline and used car prices both fell.

Following last week’s steady jobs report, the CPI report is likely to spur a rate hike by 75 basis points at the Fed’s November policy meeting and fuel speculation of a fifth straight hike. to that size in December. Traders also price the Fed at a higher high next year.

US stocks opened lower and Treasury yields rose sharply, with the short-term 30-year yield hitting 4%, the highest since 2011. The median forecast in a Bloomberg survey of Economists have called for a 0.4% monthly increase in core and 0.2%. in the overall measure.

The report highlights the extent to which high inflation has spread across the economy, eroding Americans’ wages and forcing many to rely on savings and credit cards to keep up. While consumer price growth is expected to be moderate in the coming months, it will be a step behind the Fed’s target.

Policymakers responded with the most aggressive tightening campaign since the 1980s, but so far, the labor market and consumer demand have recovered. Unemployment returned to a five-decade low in September and businesses continued to raise wages to attract and retain the employees needed to meet household needs.

Housing costs

The cost of shelter – the largest service component and account for about a third of the total CPI – rose 0.7% in the second month. Both accommodation rents and owner equivalent rents increased 6.7% year-over-year, the highest on record.

Economists argue that the housing components in the report have been elevated for quite some time, because there is a lag between real-time changes in rents and house prices and when those changes are realized. reflected in Department of Labor data. Bloomberg Economics does not expect annual interest rates for major havens to peak until the second half of next year.

Even with housing rents removed, services inflation rose at a record annual rate, underscoring the breadth and depth of price pressures.

  • Food costs rose 0.8% in the second month and 11.2% higher than a year ago

  • The food index at points of staff and schools rose to a record 44.9% from the previous month, reflecting the expiration of some free school lunch programs.

  • Used car prices fell for the third month, while new car prices continued to skyrocket

  • Airfares have skyrocketed. While gas prices fell in September, they have started to rise again

  • Americans also suffered higher prices for utilities like natural gas and electricity during the month

While the Fed sets a 2% target based on a separate measure of inflation from the Commerce Department – the personal spending price index – the CPI is closely watched by policymakers, traders and the public. . Given the volatility of food and energy prices, the core index is seen as a more reliable barometer of core inflation.

Geopolitical developments can also cause inflation to soar. OPEC+ recently announced oil production cuts, and a potential ban on gasoline exports by the Biden administration could backfire with higher pump prices.

The Russia-Ukraine war continues to disrupt supplies of commodities like wheat, while the White House is also weighing a ban on Russian aluminum – a key ingredient in cars and iPhones – in response to the its military escalation in Ukraine.

What Bloomberg Economics says…

“What really happened in the September CPI was the December FOMC meeting, and the bad news: A higher-than-expected CPI makes it difficult for the Fed to slow the pace of gains by 50 basis points. the last meeting of the year, as it indicated in the latest dot diagram it wants to do. “

–Anna Wong and Andrew Husby, economists

For full notes, click here

Fed officials have repeatedly emphasized in recent weeks the need to keep inflation in check, even if that means higher unemployment and a recession. In the minutes since the September meeting announced on Wednesday, many policymakers have emphasized that “the cost of taking too little action to bring down inflation will likely outweigh the cost of doing so.” taking too many actions”.

The determination of central banks to crush inflation, in the US and abroad, has worsened the global economic outlook. Excluding the unprecedented drop in 2020 due to the coronavirus pandemic, the IMF expects economic growth to slow to its weakest rate since 2009, amid the global financial crisis.

Inflation has also proven to be a key political issue ahead of next month’s midterms, dragging down President Joe Biden’s approval ratings and threatening Democrats’ slim majority in Congress. .

Excluding food and energy, COGS was unchanged from August. Low energy service prices rose to their highest monthly rate since 1990. Changing consumer preferences are underpinning service inflation and have helped ease demand for goods. Meanwhile, a strong dollar is dampening foreign demand for US-made products.

Labor Department data showed on Wednesday that prices paid to U.S. manufacturers rose more than expected in September, largely driven by service costs, Labor Department data showed today. Fourth, there is the potential to exert continued price pressure on consumers’ service prices. Food and energy producers’ prices also increased.

A separate report on Thursday highlighted how inflation is eroding workers’ purchasing power. Actual average hourly earnings fell in September and fell 3% from a year earlier, extending a streak of declines since April 2021.

Read more: US jobless claims hit six-week high as Hurricane Ian wakes up

(Updated with open market, added second chart)

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