Inflation seals the deal on another jumbo Fed hike
Another inflation surprise, with US CPI rising 0.4% in September 2022, cements the prospect of further aggressive rate rises from the Federal Reserve.
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Markets have moved to price in more rate hikes from the Federal Reserve (Fed) after US inflation surprised yet again to the upside. Headline CPI advanced 0.4% over the month of September 2022, surpassing expectations for another 0.2% increase. And the core measure, which excludes food and energy prices, saw a repeat rise of 0.6%. Economists had expected it to increase by 0.5%.
Price increases were broad-based across the basket. Among the biggest upward contributors was owners’ equivalent rent, which accounts for one-quarter of the overall index. This rose by 0.8%, the largest monthly increase since June 1990. Also pushing up on the index was food, which witnessed another 0.8% rise over the month.
A 2.1% drop in the energy component was one of the few subtractors, dragged down by a 4.9% decline in gasoline prices.
Another robust rise in CPI is cause for concern. Assuming the pace of core inflation were maintained for a full year, it would see a cumulative rise of 7.4%. But even more worrying is the breadth of inflation. By our estimates, some two-thirds of the core basket is 6% higher than a year ago. And with the labour market remaining tight despite some evidence of cooling, there is a material risk of second-round effects on wages and prices.
Faced with this, the Fed has little choice but to continue to aggressively raise rates. Investors are now fully pricing in a fourth consecutive 75 basis point hike in November 2022. And futures markets imply a 1 in 10 chance of an unprecedented 100 basis point increase. Given the scale of this policy tightening, we find it difficult to see how the US economy will avoid a hard landing.
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