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The Federal Reserve has been taking drastic measures against inflation with rapidly rising interest rates for months, but their efforts are hardly felt.
On Thursday, September consumer price data showed little or no change from March, when the Fed began its monetary tightening.
Total consumer prices increased 8.5% year-over-year.
Today, consumer prices have risen by 8.2%.
The Fed
In September, core prices rose 6.6% annually, the highest since 1982.
Christopher S. Rupkey, the chief economist at Fwdbonds, an economic research firm, wrote:
“This inflation report today was an unmitigated disaster. It shows whatever Fed officials are doing, it is just not working.”
The Fed has doubled down its plans to squeeze inflation out of the US economy by any means necessary.
They implemented massive rate hikes to dampen demand for goods and services.
Despite rising interest rates, there is virtually no sign of price easing.
Either way, the Federal Reserve is stoically forging ahead, betting that the country’s strong labor market can tolerate the stress of higher borrowing costs.
“The Fed will see this as a license to stay aggressive,” said Jan Szilagyi, the CEO of investment research firm Toggle AI.
Thursday’s inflation report is the last major economic overview Fed policymakers will take before their next meeting in early November.
The report guarantees another rate hike of 0.75%.
Investors currently have a 97% chance of a fourth consecutive three-quarter percentage point hike.
Financial pain
The Federal Reserve wants to continue using interest rates to ensure price stability.
Fed Chairman Jerome Powell acknowledged that the broader impact of rising borrowing costs would hurt households and businesses.
The Fed recently engaged in a mantra to inflict pain now rather than letting inflation seep into the psyche of consumers.
At the last meeting on Wednesday, Fed officials pointed out that the cost of insufficient action to curb inflation was higher than the cost of too much action.
The belief indicates that the Fed would drive the US economy into recession rather than a downward inflationary spiral.
Meanwhile, consumers endure the pain of high prices and high borrowing costs.
The struggle can also escalate with job losses.
The Federal Reserve believes that the strong labor market has contributed to inflation.
They also cited other factors beyond their attributions, including supply chain disruptions, the war in Ukraine and companies raising prices when costs fall.
Kurt Rankin, Senior Economist at PNC, said:
“Rather than walking a tightrope between a ‘soft landing’ and recession…the Fed now faces the potential of killing off the economy’s job creation impetus beyond a simple rebalancing of the labor market in the name of taming inflation.”
The fight against inflation
In the fight against inflation, the Federal Reserve is facing a tough battle.
The effects of interest rate hikes are likely to be felt in the real economy within a few months.
Fed vice chair Lael Brainard said:
The moderation in demand due to monetary policy tightening is only partly realized so far.”
He noted that the “transmission of tighter policy” is most evident in the housing market, as mortgage rates have more than doubled this year.
“We continue to see a tale of two economies in the data,” chimed in Sam Khater, the chief economist at Freddie Mac.
“Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”
Unequal pain
Thursday’s CPI reports bring economists and investors into a reality where millions of Americans have deep feelings about spending more on basic necessities like food and shelter.
More and more people are managing inflation by relying on credit cards, which will only become harder to pay off as interest rates rise.
The “food at home” index was up 13% year-over-year last month.
Meanwhile, shelters grew 6.6%, the fastest in over three decades.
Despite rising mortgage rates, housing costs have become more brutal, according to RSM Chief Economist Joe Brusuelas, who also said:
“Whatever relief in core inflation that is in the pipeline… it is not flowing through to an easing in rents.”
According to Rupkey, rate hikes have won the battle against softening prices for core commodities but are losing ground against price hikes for the services sector.
“Today’s red hot inflation report brings the economy closer than ever to recession next year,” said Rupkey.
“Supply chain bottlenecks, a volatile global energy market, and rampant corporate profiteering can’t be solved by additional rate hikes,” said Rakeen Mabud.
Mabud is the chief economist of the left-leaning Groundwork Collaborative policy group.
“It’s time for Chair Powell and the Fed to step aside and for Congress to step in.”
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