The Fed has seen it become more aggressive with the roar of inflation

Sep 13 (Reuters) – The Federal Reserve is likely to raise U.S. borrowing costs faster and further than previously expected, after Tuesday’s data showed underlying inflation widening rather than slowing as expected.

Overall consumer prices rose 0.1% last month from July – economists were expecting a decline – and gained 8.3% over the previous year period, the Labor Department reported.

The data also showed accelerating inflation in services and a particularly worrying rise in the cost of rents, which tends to be sticky from month to month, making the Fed’s inflation-fighting job even more difficult. more

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“Halting escalating housing costs is the key to taming inflation,” said Ron Temple, chief executive of Lazard Asset Management, but as rent increases tend to stall for 12 months, increases in Fed rates may not quickly bring shelter costs to the heel. “The Fed still has something to do.”

Fed Chairman Jerome Powell and his colleagues have already raised borrowing costs this year faster than at any time since the 1980s to fight high inflation for decades.

After the report, interest rate futures traders dumped any lingering bets on Fed politicians that they would slow the pace of rate hikes when they meet next week.

Instead they aimed for a third consecutive 75 basis point interest rate hike that would bring the Fed’s current policy rate range between 2.25% and 2.5% to 3% -3.25%. and they began pricing in a higher federal funds rate early next year of 4.25% -4.5%.

Rate contracts now also reflect about a one in four chance of a surprise one percentage point hike at the September 20-21 meeting, and on Tuesday, Nomura economists said they believe a 100 basis point rate hike is the most likely outcome.

“The markets underestimate how entrenched US inflation has become and the extent of the response that the Fed will likely be required to remove it,” Nomura’s economists wrote in a note in which they also predicted that the Fed will have to raise its rate. of reference at 4.5% -4.75% by February.

Nomura also asked for a 100 basis point rate hike in July, which turned out to be wrong.

But Fed policymakers ended up making a bigger rate hike in the late July meeting than they had reported, largely due to an unexpectedly hot inflation reading that came out just days before that meeting.

Until June, when Fed policy makers last published their expectations on the political path, only one – Minneapolis Fed Chairman Neel Kashkari – saw such high rates at the end of next year.

Policymakers have downplayed the importance of any single data and said they expect to continue increasing financial costs until there is a sustained decline in inflation, which is far above the target of 2. % of the Fed.

Despite easing prices for some items, such as airline tickets, the August CPI data disappointed Fed policymakers’ hopes for a broader pullback to begin.

Prices for new cars and home furnishings rose, as did food prices, while core prices – which exclude volatile food and energy components – rose 0.6% in August compared to July, double. than expected by analysts interviewed by Reuters. This brought the annual gain in core prices – a key measure of how persistent inflation could be – to 6.3%, a jump from 5.9% in July.

The report “was worse than expected; it certainly increased the Fed’s determination to remain aggressive,” wrote Roberto Perli, an economist at Piper Sandler, who added that the Fed will have to see several months of easing inflation before even thinking. at a break in rate hikes. For now, Perli said, “we are nowhere near close.”

A different measure of underlying inflationary pressures, the Cleveland Fed median CPI, also accelerated in August, climbing 0.7% from the previous month, equaling an all-time high reached in June.

WAGE-PRICE SPIRAL?

Fed politicians have been particularly sympathetic to services inflation, of which the labor bill is a big chunk. The concern is that as prices rise, workers demand higher wages to allow them to pay their bills, and employers in turn raise prices to cover higher wage costs.

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So far, policymakers have taken comfort in the relative stability of long-term inflation expectations, suggesting that a 1970s-style wage-price spiral is not in progress.

But wage growth, while still below peak inflation, is accelerating as the unemployment rate, which was 3.7% in August, remains low and labor shortages force employers to increase what they pay. to workers.

Noting that the report showed particularly strong inflation in wage-sensitive categories such as restaurants and medical care, Goldman Sachs economists raised their rate hike prospects for the year, saying they now see the Fed offering a hike. 75 basis points next week and two half percentage point increases in November and December.

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Reporting by Ann Saphir; Editing by Jonathan Oatis, Paul Simao, Chris Reese and Chizu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

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