US Inflation Rises More Than Expected!

Consumer Price Index (CPI) rose at a higher-than-expected pace of 0.4 percent month over month, up from 0.6 percent in August. Core inflation, which excludes the volatile energy and food components, eased to 4.1 percent year over year in September, down from 4.3 percent and matched economists’ expectations. Core CPI edged up 0.3 percent, unchanged from the previous month.

Shelter and gasoline costs were the largest contributors to the CPI in September, rising 2.1 percent and 0.6 percent, respectively. Compared to the same time a year ago, shelter and gas are up 3 percent and 7.2 percent, respectively.

Housing costs have soared this year as the average mortgage payment and rent are above $2,000. This has been the result of an undersupplied market and higher interest rates, experts warn. Because many homeowners secured historically low mortgage rates during the coronavirus pandemic, households are refraining from selling their residential properties, especially as the average 30-year fixed-rate mortgage is marching toward 8 percent.

The overall energy index rose 1.5 percent, including an 8.5 percent surge for fuel oil and a 1.3 percent increase for electricity. Natural gas utility service fell 1.9 percent. Global energy markets have rallied significantly since the end of June, although oil and gas prices have eased this month. The dramatic jump has been driven by worldwide supply fears as key oil-producing countries, such as Saudi Arabia and Russia, have reduced output and exports.

Food prices jumped 0.2 percent month over month, with supermarket prices flat and restaurant prices jumping 0.4 percent.

Within the food index, there were many notable gains for kitchen staples. Beef and veal prices swelled 0.6 percent, bacon surged 4.8 percent, eggs rose 0.9 percent, milk climbed 1.4 percent, and coffee increased 0.7 percent. New vehicles increased 0.3 percent, while used cars and trucks fell 2.5 percent. Apparel prices slumped 0.8 percent.

On the services front, transportation climbed 0.7 percent, and medical care advanced 0.3 percent. The higher inflation last month also led to a 0.2 percent decline in real (inflation-adjusted) average hourly earnings, the BLS noted in a separate release. Real average weekly earnings tumbled 0.2 percent.

Looking ahead, the annual inflation rate is projected to ease to 3.4 percent this month, according to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model.

Markets Reaction

The U.S. financial markets were flat in pre-market trading following the Oct. 12 inflation data, with the leading benchmark indexes seesawing between positive and negative territory.

The Treasury market was mixed as there was a divergence in the yields between short- and long-term bonds. The benchmark 10-year yield shed about 2 basis points to trade below 4.58 percent. Treasury yields had recently touched their highest levels in 16 years, but they have eased in recent sessions.

The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, rallied above 106.00. The U.S. dollar has had a strong 2023 despite hiccups earlier in the year. The DXY has soared more than 6 percent in the last three months.

A Pre-Indicator of Inflation

Following the release of the September Producer Price Index (PPI), market analysts have warned about a potential reacceleration of inflation.

Wholesale prices climbed 0.5 percent month over month and climbed to an annualized rate of 2.2 percent, up from an upwardly revised 2 percent. The core PPI also rose 0.3 percent on a monthly basis and surged to 2.7 percent year over year.

The higher-than-expected increase in the PPI was fueled by higher energy and food prices. Economists contend that the PPI is a worthwhile measurement because it can serve as a precursor to the CPI since it gauges the costs of producing consumer goods and services. The higher costs are then passed onto the consumer in the form of higher prices.

But businesses and consumers could see some relief from the surge in inflation pressures as energy commodities have cooled this month. West Texas Intermediate crude oil prices have slumped to around $83 after firming above $94 late last month, while the national average for a gallon of gasoline has slipped about 3 percent in the last week, to $3.66.

To Hike or Not to Hike?

For now, the futures market is mostly pricing in a rate pause at the policy meetings in November and December of the Federal Open Market Committee (FOMC), according to the CME FedWatch Tool. A handful of Fed officials have suggested that interest rates are high enough and that even the recent rally in Treasury yields could help do some of the U.S. central bank’s work.

Minutes from the September FOMC meeting suggested that officials debated whether to pull the trigger on one more rate hike. As rate-setting committee members discussed the need for additional policy tightening, there was one uniform opinion: Rates would need to remain in restrictive territory until the Federal Reserve was confident inflation is sustainably returning to its 2 percent target level.

“A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted,” the minutes stated.

While policymakers agreed that they need to “proceed carefully” on future decisions, they concurred that “policy should remain restrictive for some time until the committee is confident that inflation is moving down sustainably toward its objective.”

“Today’s .4% rise in Sept. #CPI, including a .3% rise in core, further confirms that the #Fed is no where near achieving its 2% annualized #inflation target,” said Peter Schiff, the chief global strategist at Euro Pacific Capita, on X (previously Twitter). “YoY headline CPI is 3.7% and YoY core is 4.1%. When will investors finally figure out that the inflation war has been lost?”

Giuseppe Sette, the president of investment research services firm Toggle AI, thinks the Fed’s rates are “already appropriate” and “the hiking cycle is done for good.”

From The Epoch Times