Core U.S. inflation rises to 40-year high, likely securing big Fed hike

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

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

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

The advance was broad based. Shelter, food and medical care indexes were the largest of “many contributors,” the report said. Prices for gasoline and used cars declined.

On the heels of a solid jobs report last week, the inflation data likely cement an additional 75-basis point interest rate hike at the Fed’s November policy meeting and spurred speculation for a fifth-straight increase of that size in December. Traders also priced in a higher peak Fed rate for next year.

U.S. stocks opened lower and Treasury yields surged, with the 30-year rate briefly hitting 4%, the highest since 2011. The median forecasts in a Bloomberg survey of economists had called for a 0.4% monthly rise in the core and a 0.2% gain in the overall measure.

The report stresses how high inflation has broadened across the economy, eroding Americans’ paychecks and forcing many to rely on savings and credit cards to keep up. While consumer price growth is expected to moderate in the coming months, it will be a slow trek down to the Fed’s goal.

Policymakers have responded with the most aggressive tightening campaign since the 1980s, but so far, the labor market and consumer demand have remained resilient. The unemployment rate returned to a five-decade low in September, and businesses continue to raise pay to attract and retain the employees needed to meet household demand.

The CPI report is the last one before next month’s U.S. midterm elections and poses fresh challenges to President Joe Biden and Democrats as they seek to retain thin congressional majorities. Already, the surge in inflation has posed a serious threat to those prospects.

Shelter costs—which are the biggest services’ component and make up about a third of the overall CPI index—rose 0.7% for a second month. Both rent of shelter and owners’ equivalent rent were up 6.7% on an annual basis, the most on record.

Economists see the housing components of the report as being elevated for quite some time, given the lag between real-time changes in rents and home prices and when those are reflected in Labor Department data. Bloomberg Economics doesn’t expect year-over-year rates for the major shelter components to peak 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.

While the Fed bases its 2% target on a separate inflation measure from the Commerce Department—the personal consumption expenditures 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 considered a more reliable barometer of underlying inflation.

Geopolitical developments could also keep inflation elevated. OPEC+ recently announced oil production cuts, and a potential gasoline export ban 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 considering a ban on Russian aluminum—a key component in cars and iPhones—in response to the country’s military escalation in Ukraine.

“What’s really at play in the September CPI is the December FOMC meeting, and the news is not 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 last meeting of the year, as it indicated in the latest dot plot that it wants to do, ” economists Anna Wong and Andrew Husby wrote in a note for Bloomberg Economics.

Fed officials have repeatedly emphasized in recent weeks the need to get inflation under control, even if that means higher unemployment and a recession. In minutes from their September meeting released Wednesday, many policymakers emphasized “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

Central banks’ determination to crush inflation, in the U.S. and abroad, has prompted a deterioration in the economic outlook globally. Excluding the unprecedented falloff in 2020 due to the coronavirus pandemic, the IMF expects economic growth to slow to the weakest level since 2009, in the wake of the global financial crisis.

Excluding food and energy, the cost of goods was unchanged from August. Services prices less energy advanced by the most since 1990 on a monthly basis. Changing consumer preferences are underpinning services inflation and have helped ease demand for goods. Meantime, a strong dollar is diminishing foreign demand for U.S.-made products.

Prices paid to U.S. producers rose more than expected in September, driven in large part by services costs, Labor Department data showed Wednesday, likely portending ongoing price pressures for consumer prices for services. Producer prices for food and energy also rose.

A separate report Thursday emphasized how inflation is depressing workers’ purchasing power. Real average hourly earnings dropped in September and were down 3% from a year earlier, elongating a string of declines dating back to April 2021.

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13 thoughts on “Core U.S. inflation rises to 40-year high, likely securing big Fed hike

  1. Elections have consequences. Those of you that voted for Biden have this catastrophe on your hands. Only getting worse the next 12 months as the housing bubble bursts at 9% interest rates and gas hits $6/gal+. Since Joementia has exhausted our strategic oil supply to help save a total midterm wipeout, gas and winter natural gas is going to beat the heck out of the everyday American. Buckle in. And remember who you vote for in 3 weeks and in 2024 have real consequences.

    1. Jaron, get serious. You sound like a career Democrat.

      Do you think for a minute Putin would have invaded Ukraine or Kim Jon Il(?) would be launching rockets if Trump had been re-elected…or, more accurately, if the Dems hadn’t devised a sinister plan to circumvent existing voting laws in key states to swing the election to Joementia?

      Of course not, so we are left with a weak, dementia-addled old political hack who the bad actors in the world righty read as giving them a blank check to do whatever the hell they damn well please, knowing numb-nuts in the Oval Offce won’t do jack squat about it….and inflation rolls on, fueled by his give-away programs to buy votes from people who can’t see past the end of the noses.

      The pandemic has little to do with our present situation.

    2. Lol of course Russia would have still attacked. Trump was in favor of that; that’s why he tried so hard to weaken NATO. You can kick and scream all you want, but the harsh reality is that his policies sucked and helped get us into this mess, and so did Bidens. But stop being a reactionary who just wants to be a contrarian with minimal thought put into their positions. It’s boring.

    3. AT – Trump did not try to weaken NATO. That is what CNN told you. Watch the video of him lambasting NATO, specifically German reps, this is what the left used to tell you that he was trying to crush NATO. It is actually him denigrating them in regards to NATO not contributing their REQUIRED GDP share to NATO, while the US does, and then Germany sends Billions to Russia for Nordstream, which Russia owns, and Billions more for natural gas. I am not a Trump fan, but you need to get off the BS already.

    4. “Trump told his top national security officials that he did not see the point of the military alliance, which he presented as a drain on the United States,” the New York Times reported in 2019. That reporting was confirmed when Trump’s former national security adviser John R. Bolton published a memoir in 2020 that described Trump as repeatedly saying he wanted to quit the alliance, saying at one point, “I don’t give a s— about NATO.” Bolton said he had to convince Trump not to quit NATO in the middle of a 2018 summit. Trump’s former chief of staff John F. Kelly, a retired four-star Marine general, was also described as saying that “one of the most difficult tasks he faced with Trump was trying to stop him from pulling out of NATO.”

      Also, the 2% GDP requirement doesn’t fully kick in until 2024 and it was a process that started prior to the Trump Administration. He also ordered the removal of 13,000 troops (1/3rd of the total) from Germany. Actions speak louder than words.

    5. AT – yes, actions speak louder than words; which is why Trump, and most sensible people, had an issue with Germany paying Billions of dollars every year to Russia, and the EU relying on Russia, for their energy. All the while, the US was fully funding our NATO commitment, as we always have, spending far more of our GDP than any other country. Get off the Trump bashing train, and join those who know how to cut through the noise, even those who don’t like Trump, know when he was right.

    6. European (and global) reliance on Russin energy is definitely a problem, but that’s not what I was talking about. What I’m talking about is Trump’s very obvious attempt to weaken NATO, which he said he wanted to do out loud to multiple people, including his top advisors. NATO members had already agreed upon a new cost-sharing agreement, so his “we pay too much,” despite it being a rounding error in the DoD budget, is a bad-faith argument to achieve preferred outcomes.

      The notion that the Russians would have held back from their offensive is simply incorrect.

  2. Jaron, yes can’t predict a pandemic, but, the lockdowns were mostly over except in the bluest of states, especially over here in the midwest when Biden took office. Biden inherited a “vaccine” and a recovered economy and has since blown it up. Back to your pandemic comment, more people died from Covid in Biden’s first year than Trump’s last. (a fact that has not been reported by the MSM of course) But remember though, Joe promised he had a plan to stop Covid, another epic failure, so he then called it a State responsibility and bailed from taking responsibility and went and got an ice cream cone.

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