The U.S. annual inflation rate came in at 8.2 percent in September, down from 8.3 percent in August, according to the latest data from the Bureau of Labor Statistics. This was higher than the market expectation of 8.1 percent.
Core inflation, which strips the volatile food and energy sectors, advanced to a 6.6 percent annual rate, a new four-decade high. This was up from 6.3 percent in August and higher than the market forecast of 6.5 percent.
On a monthly basis, the consumer price index (CPI) rose 0.4 percent, while the core CPI surged 0.6 percent.
Food and shelter costs contributed to the inflation numbers as they increased 11.2 percent and 6.6 percent, respectively, year-over-year.
The latest consumer prices data come after wholesale prices were higher than what economists had anticipated.
In September, the producer price index (PPI) rose 0.4 percent month-over-month, up from the 0.2 percent drop in August and higher than the market estimate of 0.2 percent. The annual PPI also eased at a slower-than-expected pace of 8.5 percent, higher than the market consensus of 8.4 percent.
Despite elevated prices, consumers are confident that inflation will come down next year. According to the latest Federal Reserve Bank of New York’s (FRBNY) Survey of Consumer Expectations, consumer inflation expectations for the year ahead declined for the third consecutive month, coming in at a more than two-year low of 5.4 percent. Three-year-ahead inflation expectations edged up slightly to 2.9 percent last month, up from 2.8 percent in August.
U.S. consumers anticipate prices to rise faster for gasoline, college education, food, and rent.
John Rekenthaler, the vice president of research at Morningstar, is confident that long-term inflation pressures will subside, alluding to the Fed Bank of Cleveland. The regional central bank forecasts the 10-year expected inflation rate will fall to 2.35 percent.
“[We] can I think be reasonably confident that long-term inflation will be milder than many investors now believe,” he wrote in a note.
Investors have also been keeping a close eye on inflation readings as they might offer hints on whether the U.S. central bank could pivot on monetary policy. Many traders have been pinning their hopes on something that Chair Jerome Powell noted at a press conference last month and what September Federal Open Market Committee (FOMC) policy meeting minutes revealed.
“Participants observed that, as the stance of monetary policy tightened further, it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes stated.
Indeed, after the Reserve Bank of Australia (RBA) raised the benchmark policy rate by just 25 basis points, and the Bank of England (BoE) temporarily reversed course and purchased government bonds, investors are hopeful that the Fed could follow this route.
So far, there is no indication that the Fed has started reconsidering its quantitative tightening cycle.
Some economists contend that the central bank is overtightening, which could exacerbate an economic slowdown. But Minneapolis Fed President Neel Kashkari told a town hall in Wisconsin that the bar for a pivot is “very high” due to elevated inflation.
“If the economy entered a steep downturn, we could always stop what we’re doing. We could always—if we needed to—reverse what we’re doing, if we thought that inflation was headed back down very, very quickly,” he said. “For me, the bar for such a change is very high because we have not yet seen much evidence that the underlying inflation—the services inflation, the wage inflation, the labor market—that that is yet softening.”
According to the CME FedWatch Tool, there is an 81 percent chance of a three-quarter-point rate hike at the November FOMC meeting. The odds of a 50-basis-point increase in the benchmark federal funds rate stood at 54 percent.