The September-Sept. Rate of Consumer Prices Rises, And It Is Still Not Near Normal: Fed and Wall Street Implications Reconsidered
Overall inflation increased by an annual rate of 8 percent in the year through September, more than the economists were expecting, but still less than the 8.3 percent increase in August. The rate remains extremely high.
The core index which excludes food and fuel rose more than expected and the prices increased after being removed from inflation readings to allow for a better sense of underlying trends.
Still, Fed officials and Wall Street analysts will be more closely watching the monthly figures, including what happened between August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.
Those monthly figures offered reasons for worry. Overall inflation climbed 0.4 percent in September, much more than last month’s 0.1 percent reading. The core index increased in the previous month. That pace is too fast for the Fed.
It’s not likely that moderation in goods prices alone will return America to normal inflation rate. That category — which covers everything from meals out to monthly rent — accounted for half of consumer price inflation in October, based on a Bloomberg breakdown, up from less than a third a year earlier.
The Fed aims for 2 percent annual inflation on average, though it defines that using a different inflation gauge, called the Personal Consumption Expenditures measure.
Because inflation has lingered for more than a year and a half, central bankers will be focused on wrestling it lower.
Fed officials have raised rates five times this year, and officials are expected to debate an increase of a half-point or three-quarters of a point at their upcoming meeting. The new figures will bolster the case for the bigger increase.
The Fed’s High Core Inflationary Rate: Why the U.S. Does Not Live in a Deep Recess?
Even small countries with bigger supply shocks are not immune to high energy prices. The Department of Energy is planning to release 15 million more barrels of oil from strategic reserves.
Policymakers initially thought of economic preservation. Relief measures were enacted to prevent Covid from forming a deep recession. They may have gone too far, since the goal of theStimulus packages is to raise spending and demand, keeping the economy afloat. If the supply can’t keep up with demand, prices will rise.
Central banks were slow to respond to inflation after they did, believing the impact of global catastrophes would fade as inflation subsided. So inflation increased unchecked.
Both problems were encountered by the U.S. America spent among the most of any country in the world on economic relief, likely leading to too much demand and then worse inflation. And for much of 2021, the Federal Reserve viewed rising prices as a temporary phenomenon; it didn’t acknowledge that inflation was enduring until late last year.
Overstimulus and central bank apathy helped explain why the US had the highest inflation rate among all of its peers.
If it weren’t for the war, the U.S. could still be worse off than the others. America still has higher core inflation rate, which excludes food and energy costs, than most countries, suggesting it has a deeper problem than global events that are mostly driving up food and energy costs. The labor market in particular remains hot, with an unusually high number of job openings for each unemployed worker. These are the problems that the Fed is trying to address without causing a deep recession (as I explained in this newsletter).
At this time last year, economists were hopeful that global shipping and manufacturing would clear up and consumer spending would shift towards services, which will allow supply and demand to come back into balance, slowing price increases on everything from cars to couches. That has happened, but only gradually. Some economists had thought it would take less than a year to translate into lower consumer prices.
Service inflation is related to what is happening in the job market. Tax accountants, restaurant chains and hair salon are some of the businesses that pay employees the most. When workers are scarce and wages are climbing rapidly, businesses are more likely to raise their prices to try to cover heftier labor bills.
That means that today’s very low unemployment and abnormally rapid wage growth could help to keep price increases faster than usual, even though the job market wasn’t a big driver of the initial burst in inflation.
Fed policy could come in that location. If customers are willing to pay more, companies can only charge more. The Fed can stop the chain reaction by raising interest rates.