It may be too soon to declare winners or losers in the war against inflation. But we can certainly take a look at today's inflation data and say that the Fed, well ... it ain't winning.
Here's the thing: No one expected the Federal Reserve to be able to smother inflation swiftly. But after seven months of rapidly rising interest rates, the central bank has hardly made a dent.
Thursday's look at the September consumer price data shows we're not much better off now than we were in March, when the Fed began its aggressive monetary tightening. Back then, overall consumer prices were up 8.5% year over year. Now, they're up 8.2%.
Core prices, which exclude volatile food and energy categories and are widely seen as a more reliable barometer of underlying inflation, hit 6.6% annually in September — their highest since 1982.
"This inflation report today was an unmitigated disaster," wrote Christopher S. Rupkey, chief economist at Fwdbonds, a financial markets research company. "It shows whatever Fed officials are doing, it is just not working."
Let's step back:
- The Fed is leaning on the most powerful weapon in its arsenal to ensure price stability: interest rates. It's a sledgehammer approach to solving a delicate economic puzzle.
- Jay Powell, the Fed chair, understands this. When he talks about rate hikes bringing "some pain" that's just his euphemistic way of saying folks are going to lose their jobs and the economy is possibly/probably contracting.
- But the Fed would rather crash the US economy into a recession (and potentially drag much of the global economy down with it) than wind up in an inflationary tailspin.
- In the meantime, consumers are bearing the brunt of simultaneously high prices and high borrowing costs. Soon, that pain could be compounded by job losses — or "labor market softening," in Fed parlance.
In fairness to Jay Money and all his Fed friends, the effects of rate hikes can take months to be felt in the real economy.
Or, as Fed vice chair Lael Brainard put it in a speech this week: "The moderation in demand due to monetary policy tightening is only partly realized so far."
Brainard noted that the "transmission of tighter policy" — read: pain — is most evident in the housing market.
Speaking of which: The 30-year fixed mortgage rate averaged 6.9% this week — the highest it's been in 20 years. (A year ago, it was just over 3%!)
Bottom line: Thursday's disastrous CPI report cements for economists and investors a reality that millions of Americans already feel deeply as they spend more of their income on basic necessities like food and shelter. More and more people are coping with inflation by leaning on credit cards, which only get harder to pay off as interest rates climb.
The so-called "food at home index," a proxy for grocery store prices, was up 13% last month from a year earlier. Shelter, which accounts for a third of the CPI reading, rose 6.6% — the most in more than 30 years.
The Fed's rate hikes may have won the battle with core commodities prices softening, wrote Rupkey of Fwdbonds. But the Fed is "losing the war" when it comes to price hikes for the services sector.
"Today's red hot inflation report brings the economy closer than ever to recession next year," he said.
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