PanamaTimes

Friday, Jul 26, 2024

Inflation eased in US but the underlying picture is awful and there may be a fair deal of pain ahead

Inflation eased in US but the underlying picture is awful and there may be a fair deal of pain ahead

The Federal Reserve will be particularly worried that inflation in the US - as shown by the core figure - appears to be being generated domestically.

Inflation eased in the United States in September for the third month running, but the underlying picture is awful and interest rates will rise further than predicted.

It is encouraging that the headline rate of inflation - CPI - fell on a year-on-year basis to 8.2%. It increasingly looks, on this measure, as if US inflation peaked at 9.1% in June, which was the highest in four decades, slipping to 8.5% in July and 8.3% in August.

That was, though, slightly higher than the 8.1% that the market had been expecting. Worse still was the figure for so-called 'core' inflation, the figure which strips out volatile elements such as energy and food.

This came in at 6.6% on a year-on-year basis - up from 6.3% in August and the biggest such increase since August 1982. On a month-on-month basis, core inflation was up 0.6% from August, again significantly ahead of the 0.4% that Wall Street had been expecting.

The news all but guarantees another big interest rate rise from the US Federal Reserve next month.

The Fed has raised its main policy rate - Fed Funds - by 75 basis points (three quarters of 1%) at each of its previous three meetings and is almost certain to do so again next month. That would take Fed Funds to a range of 3.75%-4%. The big question now is whether the Fed goes for a full 100 basis point increase and takes its policy rate to a range of 4%-4.25%.

What will particularly have worried the Fed is that inflation in the US - as shown by the core figure - increasingly appears to be being generated domestically. Previously, there was a case for saying that it had been externally generated, with the war in Ukraine pushing up both energy and food prices. The strength of the core inflation numbers, though, give the lie to that.

As Seema Shah, chief global strategist at Principal Asset Management, put it: "After today's inflation report, there can't be anyone left in the market who believes the Fed can raise rates by anything less than 75 basis points at the November meeting.

"In fact, if this kind of upside surprise is repeated next month, we could be facing a fifth consecutive 0.75% hike in December with policy rates blowing through the Fed's peak rate forecast before this year is over.

"The composition of the inflation reading is perhaps even more worrisome than the overall number. Increases in shelter and medical care indices, the stickiest segments of the CPI basket, confirm that price pressures are extremely stubborn and will not go down without a Fed fight.

"What's more, with food also a key contributor to this month's number, it suggests household budgets may be coming under severe pressures. Slowing growth yet rising inflation - the combination none of us, and least of all the Fed, want to see."

As with the Bank of England in the UK, the Fed has come under pressure for being behind the curve, slow to pick up on inflationary pressures building in the system last year and responding more rapidly with interest rate rises.

It has, though, responded to the take-off in inflation more aggressively than any other central bank around the world.

The Fed's main policy rate - Fed Funds - stood at a range of 0%-0.25% at the end of last year but has since been increased five times and now stands at the current range of 3%-3.25%. It represents the fastest pace at which the Fed has raised interest rates since the early 1980s when Paul Volcker, one of the Fed's most revered chairmen of all time, declared war on the high inflation levels that had blighted the US during the 1970s.

US Federal Reserve Board Chairman Jerome Powell


By contrast, the Bank of England's main policy rate, Bank Rate, stood at 0.25% at the beginning of the year and is now at 2.25%, pointing to more caution at Threadneedle Street. Other central banks too have raised their main policy rate more aggressively than the Bank, including the Reserve Bank of Australia and the Reserve Bank of New Zealand.

The Fed seems certain to continue raising rates aggressively and the expectation must be that interest rates in this cycle will now peak at a higher level than was previously expected.

Jerome Powell, the Fed chairman, has indicated that he would even be prepared to risk a US recession if that is the price that needs to be paid to bring inflation back under control.

The August number had already delivered a warning that core inflation was the main concern. That will now intensify.

Part of the strength in US core inflation reflects, as in the UK, the tight labour market. The number of people of working age who are actually seeking work has fallen on both sides of the Atlantic - pushing up wages for those who are in work. Those higher labour costs for employers are ultimately passed on to their consumers.

If the hot inflation number mean higher interest rates in the near term, it also means pain further down the line to those exposed to them, both businesses and homeowners.

In particular for many US consumers, who during the summer enjoyed a respite from inflation in the shape of lower inflation, there may be a fair deal of pain ahead.

And recent history tells us that, when the US consumer suffers, so too does the global economy.

Newsletter

Related Articles

PanamaTimes
0:00
0:00
Close
Mexican Drug Lords El Mayo and El Chapo's Son Arrested in Texas
World's Hottest Day Recorded on July 21
Joe Biden Withdraws from 2024 US Presidential Race
A Week of Turmoil: Key Moments in US Politics
Global IT Outage Sparks Major Concerns
Global IT Outage Unveils Digital Vulnerabilities
Secret Service Criticized for Lack of Sniper Protection During Trump Shooting
Colombian Court Annuls Amazon Tribes’ Carbon Credit Deal
Sunita Williams Safe on ISS, to Address Earth on July 10
Biden Affirms Commitment To Presidential Race
Boeing Pleads Guilty Over 737 MAX Crashes
Beryl Storm Hits Texas, Killing 2 and Causing Major Power Outages
2024 Predicted to Be World's Hottest Year
Macron Faces New Political Challenges Despite Election Relief
Florida Man Arrested Over Attempt to Withdraw One Cent
Anger mounts at Biden’s top team after disastrous debate
Bolivian President Luis Arce Denies 'Self-Coup' Allegations
Steve Bannon Begins 4-Month Prison Sentence
Biden Warns of 'Dangerous Precedent' After Supreme Court Immunity Ruling in Trump Case
Elon Musk Accuses Kamala Harris of Misleading Post on Trump's Abortion Stance
Hunter Biden Sues Fox News Over 'Revenge Porn' Allegations
New York Times Editorial Board Urges Biden to Exit Presidential Race
US Supreme Court Overturns Obstruction Charges Against January 6 Rioters
US Voters Prefer Biden's Democracy Approach, Trump's Economy Plan: Report
Attempted Coup in Bolivia: President Urges Public Mobilization
Top-Secret US Underwater Drone 'Manta Ray' Revealed on Google Maps
United States Bans Kaspersky Antivirus
Inside El Salvador’s 40,000 Inmate Mega-Prison
Toyota, Mazda, Honda, and Suzuki have committed fraud; falsified safety test results
El Salvador's Bitcoin Holdings Reach $350 Million
Teens Forming Friendships with AI Chatbots
WhatsApp Rolls Out Major Redesign
Neuralink's First Brain Implant Experiences Issue
Apple Unveils New iPad Pro with M4 Chip, Misleading AI Claims
OpenAI to Announce Google Search Competitor
Apple Apologizes for Controversial iPad Pro Ad Featuring Instrument Destruction
German politician of the AFD party, Marie-Thérèse Kaiser was just convicted & fined $6,000+
Changpeng Zhao Sentenced to Four Months in Jail
Biden Administration to Relax Marijuana Regulations
101-Year-Old Woman Mistaken for a Baby by American Airlines: Comical Mix-Up during Flight Check-in
King Charles and Camilla enjoying the Inuit voice singing performance in Canada.
New Study: Vaping May Lower Fertility in Women Trying to Get Pregnant
U.S. DOJ Seeks Three-Year Sentence for Binance Founder Changpeng Zhao
Headlines - Thursday, 23 April 2024
Illinois Woman Wins $45M Lawsuit Against Johnson & Johnson and Kenvue for Mesothelioma Linked to Baby Powder
Panama's lates news for Friday, April 19
Creative menu of a Pizza restaurant..
You can be a very successful player, but a player with character is another level!
Experience the Future of Dining: My Visit to an AI-Powered Burger Joint
Stabbing rampage terror attack in Sydney, at least four people killed, early reports that a baby was among those stabbed.
×