【ARCFE Finance】 ANALYSTS BET ON A FULL PERCENTAGE POINT RATE HIKE AFTER HOT INFLATION DATA
09/14/2022 by ARCFE U.S.
The key U.S. inflation report for August was published yesterday with inflation at 8.3%, slightly higher than the 8.0% expectation. For much of the year, many economists and policymakers viewed inflation as essentially a food and fuel issue. The idea is that once supply chains are loosened and gas prices come down, it will help to lower the cost of food and in turn, ease price pressures across the economy. However, the CPI data for August seriously tested this claim, suggesting that inflation may now be more persistent and entrenched than previously expected.
It’s important to note that the source of this increase was not fuel, which fell 10.6% in August. And while the drop in energy prices over the summer has helped to moderate headline inflation figures, it has failed to stray away from fears that inflation will remain a problem for some time. Food, shelter and health services saw an increase in costs, imposed steep taxes on those least able to afford them.
Prices for new cars and medical services both rose 0.8%. Housing costs, which include rent and various other housing-related expenses, rose 0.7% and make up nearly one third of the CPI’s weight. The food at home index (a good proxy for grocery prices) rose 13.5% over the past year, the biggest gain since March 1979. On the positive side, prices for items such as airline tickets, coffee and fruit have fallen again. A New York Fed survey released earlier this week suggests that consumer concerns about inflation are waning, although they still expect it to linger around 5.7% a year from now. There are also signs that supply chain pressures are easing.
With so much inflation still brewing, the big economic question is how much will the Fed raise interest rates. Analysts previously predicted that they will raise 0.75 percentage point in the September FOMC meeting. Previously in July’s FOMC meeting, Mr. Powell has also suggested that the Fed was not likely to slow down interest rate increases until inflation falls closer to their long-term 2% target.
Many analysts previously predicted that the Fed will make a 0.75 percentage point increase in September. Essentially conveying the message that combating inflation is more important than supporting growth at this point, as the economy doesn’t work for anyone if there’s no price stability. In his speech in Jackson Hole on August 26, Fed Chairman Jerome Powell emphasized on the central bank’s efforts and commitment in tackling record-high inflation by raising interest rates.
According to CME Group’s FedWatch Tool, expectations for a 0.75 percentage point increase dropped from 86% to 60%, while a full 1 percentage point increase jumped from negligible to 40%. Jeremy Siegel, a finance professor at Wharton Business School, mentioned in his interview with CNBC that the economic data that the Fed relies on has a significant lag. For example, Real estate prices have started to slow across the country now, but they are not reflected in the data. Mr. Siegel pointed out that it generally takes 3-6 months for economic data to fully reflect the real situation. In these 3-6 months, if the Fed does not take into account the limitations of the data and makes excessive tightening policies, it will lead to a downward economic recession. Therefore,he and many industry professionals are calling on the Fed to not blindly rely on this economic data, but also combine data and on-the-ground market feedback to make the right economic policies.
The next FOMC meeting is scheduled for September 20-21, 2022.
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