Inflationary Results from Central Bank Policymakers: Consequences for Real-time Prices and the Fed’s Obsession with a Higher Benchmark
Those monthly figures offered reasons for worry. The overall inflation reading in September was much higher than last month. The core index climbed 0.6 percent, matching a big gain in the prior month. That pace is far too fast for the Fed.
The Bureau of Economic Analysis said that the Personal Consumption Expenditures price index rose in August from a year ago, after a revised July reading. That was viewed as a driver behind the central bank’s decision to raise its benchmark rate by three-quarters of a percentage point for the third time in a row earlier this month.
The core inflation measure, which excludes the volatile categories of food and energy and is the number watched most closely by Fed policymakers, rose by 4.9% on a year-over-year basis in August, up from 4.7% in July. Core PCE surged by 0.6% for the month, a spike from July’s revised 0%.
Because of fast inflation, central bankers are almost certainly going to stay focused on wrestling it lower, as an array of goods and services has expanded.
The so-called core index, which is an indication of underlying trends, increased more than economists had expected, due to the removal of fuel and food from the inflation reading.
Fed officials and analysts will pay more attention to the monthly figures 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.
Many economists expect inflation to moderate in the months ahead as supply chains heal, declines in used car prices make their way to buyers and consumer demand pulls back. They expect the progress to be gradual because rents and other service costs are going up. But the progress has been bumpy so far.
It is not clear if the Fed is aiming for 2 percent annual inflation on average or using the Personal Consumption Expenditures measure.
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 help bolster the case for a bigger increase.
Another key inflation measure shows price pressures cooled off but remained stubbornly high in November, despite the Federal Reserve’s monthslong efforts to fight inflation through higher interest rates.
The Producer Price Index, which measures prices paid for goods and services by businesses before they reach consumers, rose 7.4% in November compared to a year earlier, the Bureau of Labor Statistics reported Friday. The revised increase of 8.1% was reported for October.
The US stocks fell immediately after the report was released as economists were expecting wholesales prices to have risen just 7.3% annually. The higher than expected inflation readings raised concerns about if the Fed could slow the pace of rate hikes.
Preliminary Consumer Price Index Results from the QCD Fed Funds Rate vs. the PPI Report, and How the CPI is Going
The futures market shows a strong likelihood of a half-point increase in the Fed funds rate at the next meeting, rather than the three-quarter point hike that was instituted last week.
The Consumer Price Index, which measures the prices consumers pay for goods and services, is the same thing as the PPI report. But this is a rare month in which the PPI report came out before the CPI report, which is due out Tuesday.
“Next Tuesday’s CPI release will be more important than today’s data, but with traders on edge, any indication that prices remain elevated and that inflation is more sticky than currently believed is a negative for markets,” said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.
Stripping out volatile food and energy prices, core PPI rose 6.2% for the year ending in November, down from the revised 6.8% increase the previous month. Economists were expecting only a 5.9% increase.