Central banks have made clear that after a sluggish start, they're serious about putting a lid on inflation. Now, as prices soar even faster than expected, they're weighing increasingly drastic options.
What's happening: Investors see a growing probability that the Federal Reserve could hike interest rates by a full percentage point at its next meeting for the first time in the modern era. In June, the Fed raised interest rates by three-quarters of a percentage point, which it hadn't done since 1994.
US stocks mostly shrugged at the news on Wednesday that consumer prices jumped 9.1% year-over-year in June, a fresh 40-year high and a larger increase than forecast. But policymakers indicated deep concern.
"Everything is in play," Atlanta Federal Reserve Bank President Raphael Bostic told reporters on Wednesday.
Previously, Fed officials had expressed worries about the consequences of a hike of that magnitude.
"I think the markets would have a heart attack," Fed Governor Christopher Waller said last month.
Yet traders see such an extraordinary increase as more and more likely. Markets on Thursday assigned it an 81% probability, according to data from CME Group.
Breaking it down: Short-term, the inflation picture is undeniably nasty, putting pressure on central bankers to get the situation under control quickly.
"I saw that data and thought: This wasn't good news," Mary Daly, president of the Federal Reserve Bank of San Francisco, told the New York Times on Wednesday — though she added she hadn't been optimistic.
Much of the June increase was driven by a jump in gasoline prices, which were up nearly 60% over the year. But inflation concerns have moved beyond energy. The shelter index climbed 5.6% over the last year (more on that below). The price of household furnishings jumped 9.5% during the same period, while airline fares leaped more than 34%.
For guidance on what comes next, look to America's northern neighbor. The Bank of Canada increased its main interest rate by a full percentage point on Wednesday, noting that inflation in the country was "higher and more persistent" than the central bank thought in early spring.
Other policymakers are in action, too. South Korea and New Zealand raised rates yesterday, while Singapore's monetary authority and the central bank of the Philippines made emergency decisions to tighten policy earlier Thursday.
"Clearly, given other central banks are acknowledging the need to step up, the Fed isn't alone anymore," James Knightley, ING's chief international economist, told me. That gives it "more cover to go more aggressively."
Knightley still predicts a hike of three-quarters of a percentage point later this month, given concerns among many Fed officials about pushing the United States into a recession. But a full point increase is "certainly on the table" due to the recent batch of inflation data, he noted.
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