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Despite the Fed’s historically aggressive rate hikes and another 5-percent drop in gasoline prices, inflation remained stubbornly high in September, as prices rose 0.4 percent compared to August and 8.2 percent compared to September 2021. According to the Bureau of Labor Statistics, increases in prices for shelter, food and medical care offset the drop in gas prices, resulting in yet another higher-than-expected inflation reading. Food prices increased 0.8 percent from August and 11.2 percent from a year ago, while the subindexes for shelter and medical care services were up 0.7 and 1.0 percent from the previous month, respectively.
The less volatile core CPI-U excluding food and energy rose by 0.6 percent in September, as the exclusion of gasoline and other energy commodities negated the category’s cooling effect on inflation last month. Year-over-year, core inflation came in at 6.6 percent, the highest reading since August 1982. Given that inflation didn’t really move despite the Fed’s aggressive action, it is now considered more than likely that the Federal Open market Committee will issue the fourth consecutive 0.75 point rate hike next next month, after some had hoped for a more modest increase in case of a cooler inflation reading.
When inflation started spiking in the spring/early summer of 2021, it was largely due to the so-called base effect, reversing the pandemic’s cooling effect on consumer prices a year earlier. At the onset of the pandemic, prices had taken a dive due to a sudden drop in consumer spending and fuel demand before slowly climbing back to their pre-pandemic trajectory over the summer and fall. Due to that initial dip in consumer prices, year-over-year comparisons were always going to be exaggerated for a while, but that is no longer the case.
Taking that into account, the Federal Open Market Committee said in April 2021 that it was going to aim for “inflation moderately above 2 percent for some time” before raising interest rates to achieve a long-term average of 2 percent inflation. From today’s point of view, it looks like the Fed started tightening a little too late and is now trying to make up for lost time.
This chart shows the year-over-year change of the Consumer Price Index for All Urban Consumers in the U.S.
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