US Inflation Eases: Fed Signals No Immediate Rate Hike

US Inflation Eases as Fed Signals No Immediate Rate Hike

In the United States, inflation appears to have moderated once again, offering a glimmer of hope for a beleaguered economy. Economists are predicting a 0.3% increase in consumer prices from August to September, according to a survey by FactSet. While this rate is slower than the previous month’s 0.6% price surge, it still falls short of the Federal Reserve’s 2% inflation target.

The core inflation figure, which excludes volatile food and energy costs, is also expected to rise by 0.3% in September, mirroring August’s performance. The Fed closely monitors core inflation as it serves as a key indicator for gauging future inflationary trends.

The release of the latest inflation data may reinforce or challenge the growing belief that the Fed can bring inflation under control through the series of 11 interest rate hikes implemented since March 2022, without plunging the economy into a recession.

The unexpected surge in hiring reported last month has the potential to drive consumer spending, a vital component of the economic engine. However, it’s worth noting that the wage growth rate has slowed, which, if sustained, could help alleviate inflationary pressures.

The recent dip in inflation, following its peak at 9.1% in June 2022, has been remarkable, as it defied the expectations of economists who anticipated significant job losses as the only means of slowing price increases.

Adding a layer of complexity to the economic landscape, longer-term interest rates have experienced a notable upswing, raising borrowing costs for mortgages, auto loans, and business loans. Despite a slight decrease from its peak of nearly 4.9%, the yield on the 10-year Treasury note hovered around 4.6% on a recent Wednesday, significantly up from 3.3% in April. Some Fed officials have suggested that these higher long-term rates might act as a natural brake on the economy, potentially reducing the need for further increases in the central bank’s short-term rate.

Moreover, several factors have converged to drive up long-term rates, including the acknowledgment by financial markets that the economy is on a more stable footing than initially anticipated. Additionally, the government’s budget deficit has grown, requiring more Treasury debt issuance to cover it. This has led to a higher supply of Treasuries, thereby necessitating higher yields to attract buyers.

A pivotal reason behind this rate increase is the growing uncertainty among investors regarding the future path of inflation and interest rates. Investors are demanding higher long-term Treasury yields to compensate for this heightened risk.

Economists are expecting the upcoming inflation report to reveal a year-over-year increase of 3.6% in consumer prices for September, down slightly from the 3.7% annual rise observed in August. On an annual basis, core price increases are projected to have decelerated to 4.1% from 4.3%.

Notably, fluctuations in gas prices have played a role in driving overall inflation up from August to September, although they have since subsided, with the national average price per gallon falling to $3.66, according to AAA.

Wild-card factors, such as used car prices, have the potential to cause inflation to deviate from expectations in September. Some economists anticipate a decline in used car prices, while others foresee a marginal increase.

As the US economy continues to navigate the complex terrain of inflation and interest rates, the upcoming inflation data will play a significant role in shaping the Federal Reserve’s policy decisions and offering insight into the economic landscape for the months ahead.