Core US inflation rose more than expected in September, hotly anticipated data released on Thursday showed. It was another bitter disappointment for policymakers and markets alike.
Excluding food and energy, consumer prices rose 0.6% last month from August (figure below), a much brisker pace than the 0.4% consensus expected. It was the second consecutive 0.6% MoM print.
At 0.4%, headline price growth was twice as hot as expected.
Note that core prices have risen at least 0.6% in five of the last six months. In the simplest possible terms: Things aren’t improving. The YoY prints on headline and core, at 8.2% and 6.6%, respectively, were both ahead of estimates. The latter was a new 40-year high.
Although another drop in the gasoline index pushed the broad energy gauge lower, natural gas and electricity prices moved up again.
At the same time, the food gauges (all of them) rose by the same amount they increased in August. All six major grocery store food group indexes increased.
On a 12-month basis, food at home and electricity prices rose 13% and 15.5% last month, respectively. That was basically unchanged from August. As a (painful) reminder, it’s rare that both grocery and power bills rise double-digits simultaneously. Or at least it was rare. It’s a common occurrence in 2022 (figure below).
The optics of that politically and from a policy perspective are very poor indeed. Just like so many struggling families around the US, who are coping with deeply negative real wage growth as a consequence of generationally high inflation.
Obviously, shelter prices are among the biggest concerns. For the Fed, yes, but particularly for people trying to put a roof over their head.
The shelter index rose 0.7% for the second month in row. The YoY gain was 6.6%. This was wholly predictable (figure below). And it’s not likely to abate in the very near-term.
What you’re seeing in the shelter gauges is a lagged effect. It’ll have to run its course. There’s nothing anyone can do about it, because it’s effectively already happened.
The pace of home price growth is decelerating (rapidly, in some cases) but that’ll only manifest in CPI outcomes down the road. The chart (above) makes that abundantly clear.
In the meantime, markets and the Fed are condemned to wait it out. Renters are just plain old condemned.
The rent index and owners’ equivalent rent rose 0.8% MoM in September. The latter was the the largest monthly increase in more than 32 years (figure above).
Outside of the drop in the gasoline gauge and the largest decline on the used vehicles index since March (which isn’t necessarily a good thing to the extent it’s indicative of an insidious deflationary undercurrent), there was virtually no relief to be had in September’s CPI report. The transportation services gauge rose 1.9% from August and 14.6% YoY, for example. Medical care services rose 1%, the biggest monthly gain since 1982.
Plainly, this will be received by the Fed as a sign that the job is far from done. Indeed, it’s not obvious they’ve made much progress at all. That’s disconcerting given pervasive evidence of market fragility. The nightmare scenario wherein rate hikes prove insufficient to arrest inflation but wholly effective at engineering market chaos, is now closer to realizing.
Investors, the Fed all need to remember to skate to where the puck will be rather than where it is currently…………………………………..
In addition, given loose monetary policy failed to lift inflation for a decade maybe monetary policy might be too blunt to curb it.
The fiscal irresponsibility will collide with tighter monetary policy (and financial conditions tightening) creating a situation where once again policymakers will be in panic mode in 6 to 12 months.
The definition of insanity is doing the same thing over and over and expecting different results. The Fed blew it last year and now are going to blow it this year if thy are not very careful (they may have already crossed the rubicon).
I have not had confidence in this Fed for years and it does not appear to be likely I will soon either.
Not deflation. Not even disinflation. 75bps in Nov. and 50bps in December are all but certainties.
The fed allowed trump and associates to brow beat them away from hiking a few years ago, and lost all credibility with me at that time.
agree Trump’s public intimidation / bullying of Powell contributed mightily in this …
Perhaps the pivot peddling pundits will go away for a while now. Prattle about gilts and yen and EMs is peripheral. The Fed will pivot eventually. yes, but from significantly lower price levels.
I’d gently suggest that concern over a totally unanchored gilt market and unchecked UK rates volatility, is not “prattle.” Neither is concern over the yen, nor is it immaterial that emerging markets are struggling to cope with the pace of Fed hikes.
Having expressed my concern about the plight of middle- and lower-income Americans both in this article and every single day for seven years running, I’m free to say this: There are things that matter in the world other than how much Americans pay for a box of Little Debbie snack cakes and how much it costs to fill up a tank-sized SUV.
The idea that the Fed can (or would) countenance a total meltdown in gilts (wherein the UK literally lost market access), or an uncontrolled collapse in the yen is laughable. Same goes for an EM debt crisis rerun. Fortunately, Truss will probably blink, Treasury can probably help manage the yen just by verbally endorsing MoF intervention and EMs are more sturdy than they’ve been in the past.
But if there’s a total seizing up somewhere, or if UST liquidity deteriorates such that the market is impaired in any literal sense of the word “impaired,” you’ll hear plenty of “prattling.” And you won’t hear anything about inflation. The Fed will step in, and they won’t care about anyone’s opinion on the matter. Not mine, not yours, not Congress’s, not Joe Biden’s, not Elon Musk’s, not Larry Summers’s, not Bill Dudley’s, and not Mohamed El-Erian’s either.
I read earlier today that the Fed “bailed out” Credit Suisse by providing a $3b swap line to the Swiss National Bank. $3b isn’t a lot when in the grand global finance scheme of things, and I expect we’ll see more such activity on the part of Fed as it continues to target generationally high inflation while also acting to keep things from really seizing up.
The SNB has a standing swap line with the Fed. That’s not a “bail out.”
“Prattle” was the most benign of the words starting with “P”. Pontificate, peach, prophesy, piffle, palavar, peep – all seemed worse. I obviously had to use a word starting with “P”, because “pivot” starts with “P” and the internal logic goes from there.
Stepping out of alliteration, I agree that when something important in the financial system breaks, fixing it will be the top priority. I think the Fed will use repo, swap, and similar liquidity facilities before it will use QE, and will use QE before it will reverse course on rates.
Will the Fed be forced to reverse on rate hikes before getting FF to 400-450bp – i.e. to prematurely pivot? I don’t know, but I think at that point equity and fixed income prices will be lower than today. Which is why it irritates me to see pivot potential pitched as the prospect of profit (away from here).
Volcker went to 20%! As H has said our [generally selfish, me] country is put out by paying out for food while they are miffed if they can’t get a deal on cell service or fill up their SUVs. When I was a kid and my parents moved after the war, we couldn’t get a phone line for six months. When we did get one it was a five-party line. My pre-school entertainment was listening in. I was eight when we got a private line. We couldn’t afford a car until about the same time. In my metro area thousands of kids go hungry daily. Hundreds of thousands face food insecurity. The food bank distributed over 40 mil tons of food last year, more this year. The majority of everyone’s budget is tied up in three things; shelter, food, and transportation. Rent has skyrocketed. as shown by the chart in the post. This will not be coming down. Heat light and power won’t be getting cheaper, nor will food. Labor costs are finally up and they, too, tend to be sticky and unlikely to fall, at least in current dollar terms. Peripheral budget items may fall from Fed pressure, but that won’t help us with most of our spending. And health care, if you can get it …?
That gilt prattle sure did turn out to be meaningful on Thursday. 🙂 I’m sure there was sysmatic / programmatic buying going on, but any explanation for the U-turn across markets Thursday has to include a mention of the potential Truss fiscal fold and the accompanying gilt surge and 2% (!) sterling rally.
It sure seems like the UST market and liquidity are the next shoe to drop. What are some likely scenarios to cause this? I assume the Fed is the only one that can step in and start purchasing enough treasuries to stabilize things and inflation will be the furthest thing from their mind.
Yet another triumph of Central planning thru incessant interventions of fiscal and monetary policy: are we gettin’ tired of “winning” ?? Add to that the endless nauseating blather of the federal open mouth committee who never miss chance to be on TV.
This isn’t just the product of monetary policy. There’s fiscal culpability (which you alluded to, but didn’t expand on) and, plainly, the impact of a rapidly de-globalizing world, not to mention the bloc-i-fication of trade and finance due to wars, both hot and cold, shooting and economic. Folks, when you comment here, remember: This isn’t the place for ad hoc, no-value-add derision.
Honestly with the inflation numbers coming in as hot as they have, will 75 bps instead of 50 make any meaningful dent on the inflation prints we’ll see in the next 6 months? I doubt it, OER is the perfect example, the Fed going 75-75 next 2 meetings will not impact that inflation input, so in reality all the aggressive hiking from now on (I would include last hike too) is simply to help with the Fed’s image, that is the sole benefit. Not a good risk reward in my opinion when you consider the possible consequences, should they continue hiking? Probably yes, but at a much more moderate pace, faster panicky hikes at this point can only make things worst for the US and global economies, not to mention that a severe recession might cement the return of MAGA to power, how does the war with Putin look in that case? Biden would be wise to borrow a page from the former president and from senator Warren and start applying some pressure on the Fed, central bank independence be damned, the stakes are too high, this is about more than inflation and monetary policy, if MAGA returns, it will be about democracy and the existential viability of the US as a nation.
Well put there, Evil One. Damn scary as well.