Sep 13 (Reuters) – The Federal Reserve is expected to raise U.S. borrowing costs faster and further than expected after data on Tuesday showed core inflation was widening rather than easing as expected.
Overall consumer prices rose 0.1% last month from July – economists had expected a decline – and gained 8.3% year-on-year previous year, the Labor Department reported.
The data also showed an acceleration in inflation in services and a particularly worrying rise in the cost of rent, which tends to remain flat month-on-month, making it all the more difficult to tackle the problem. fed inflation
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“Putting the brakes on escalating housing costs is a keystone in bringing inflation under control,” said Ron Temple, managing director of Lazard Asset Management, but as rent hikes tend to be stalled for 12 months, the Fed rate hikes can not quickly shelter. heel costs. “The Fed still has work to do.”
Fed Chairman Jerome Powell and his colleagues have already raised borrowing costs faster this year than at any time since the 1980s to combat decades-high inflation.
After the report, interest rate futures traders dropped all lingering bets on Fed policymakers slowing their pace of rate hikes when they meet next week.
Instead, they piled into bets on a third straight 75 basis point interest rate hike that would take the Fed’s current 2.25%-2.5% policy rate range to 3. % to 3.25%, and began setting a higher federal funds rate early next year of 4.25%-4.5%.
Rates contracts now even reflect about a one-in-four chance of a surprise one-percentage-point hike at the Sept. 20-21 meeting, and economists at Nomura said on Tuesday they now believe a hike rates of 100 basis points was the most likely. results.
“Markets are underappreciating how entrenched US inflation has become and the magnitude of the response that will likely be required from the Fed to unseat it,” Nomura economists wrote in a note in which they also predicted that the Fed will have to raise its key rate to 4.5. %-4.75% in February.
Nomura also called for a 100 basis point rate hike in July, which turned out to be wrong.
But Fed policymakers ended up offering a bigger rate hike at their late-July meeting than they had signaled, largely because of surprisingly high inflation that came out days before that. meeting.
As recently as June, when Fed policymakers last released their own policy trajectory expectations, only one — Minneapolis Fed Chairman Neel Kashkari — saw rates this high at the end of next year.
Policymakers downplayed each data point and said they plan to keep raising borrowing costs until there is a sustained decline in inflation, which is well above the mark. Fed’s 2% target.
Despite an easing in prices for some items, such as airline tickets, the August CPI data dashed Fed policymakers’ hopes of the start of a broader pullback.
Prices for new cars and household furnishings rose, as did food prices, while core prices – which exclude volatile food and energy components – jumped by 0, 6% in August from July, double what analysts polled by Reuters had expected. That put the annual gain in core prices – a key measure of inflation persistence – at 6.3%, a jump from 5.9% in July.
The report “was worse than expected; it certainly reinforced the Fed’s resolve to remain hawkish,” wrote Roberto Perli, an economist at Piper Sandler, who added that the Fed will have to see several months of slowing inflation before even to think about a break in rates. hikes. Right now, Perli said, “we’re not even remotely close.”
A different measure of underlying inflationary pressures, the Cleveland Fed median CPI, also accelerated in August, rising 0.7% from the previous month, matching a peak reached in June.
Fed policymakers have been paying particular attention to services inflation, of which the labor bill represents a significant portion. The problem is that as prices rise, workers demand higher wages to pay their bills, and employers in turn raise prices to cover higher wage costs.
So far, policymakers have been reassured by the relative stability of long-term inflation expectations, suggesting that a 1970s-style price-wage spiral is not underway.
But wage growth, while still below peak inflation, is picking up as the unemployment rate, which was 3.7% in August, remains low and labor shortages are forcing employers to increase what they pay workers.
Noting that the report showed particularly strong inflation in wage-sensitive categories like restaurants and medical care, Goldman Sachs economists raised their outlook for rate hikes for the year, saying they now see the Fed proceeding. to a 75 basis point hike next week and two half-percentage point hikes in November and December.
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Reporting by Ann Saphir; Editing by Jonathan Oatis, Paul Simao, Chris Reese and Chizu Nomiyama
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