US consumer prices rise sharply despite Federal Reserve rate increases

The rapid rise in US consumer prices showed no signs of abating in September, prompting a see-saw trading session on Wall Street, as investors weighed whether the Federal Reserve will have to become even more aggressive to slow rampant inflation.

The consumer price index’s core measure of inflation, which strips out volatile energy and food costs, rose 6.6 per cent on an annual basis last month, faster than the 6.3 per cent rate in August — and its fastest pace in four decades.

The increase in the overall CPI last month, including energy and food, rose 8.2 per cent over a year earlier, little changed from the 8.3 per cent annual rise recorded in August.

Compared with the previous month, overall CPI rose 0.4 per cent while the core measure increased 0.6 per cent.

The S&P 500 dropped 2.4 per cent shortly after Wall Street’s opening bell on Thursday; before markets opened, the futures market had indicated a 1.3 per cent gain. However, stocks staged a dramatic turnround and closed 2.6 per cent higher. The Nasdaq Composite ended 2.2 per cent higher, recovering from a decline of about 3.2 per cent.

The yield on two-year Treasuries, which is sensitive to changes in monetary policy expectations, surged 0.24 percentage points to 4.53 per cent, its highest level since mid-2007, before dropping back to be up 0.18 percentage points up on the day.

Jamie Dimon, chief executive of JPMorgan Chase, said that while he could not predict whether tougher monetary policy would plunge the US economy into a deep recession, the failure of markets to sell off more sharply was an indication investors still believed a “mild recession” was possible.

“My point, in the tough recession, you would expect the market to go down around another 20 or 30 per cent,” Dimon said on Thursday at the Institute of International Finance annual membership meeting.

Dimon noted that consumer spending was still much higher than before the Covid-19 pandemic, adding that consumers “could probably do that for another nine months before inflation and spending catches up with them. Which is why I think you’re going to see a strong economy for a while.”

Investors and economists had been looking for signs that the Fed might start to slow the pace of its interest rate rises from the 0.75 percentage point increases it has announced at each of its past three meetings. But the CPI data released on Thursday suggest such a move is not yet on the immediate horizon.

Following the report, traders in the futures market priced in a 98 per cent chance that the Fed would lift interest rates by 0.75 percentage points in November, compared with 84 per cent on Wednesday.

Kathy Bostjancic, chief US financial economist at Oxford Economics, said consumer inflation remained “stubbornly elevated” due to “a continued broad-based surge” in prices for core services. “High inflation readings will keep the Fed in an aggressive tightening mode and on course for at least another 125 basis points this year,” she wrote in a note.

The futures market now expects the fed funds rate to reach 4.94 per cent by May 2023, up from 4.65 per cent the previous day. The central bank’s policy rate is in a target range of 3 per cent to 3.25 per cent.

One of the most troubling features of the CPI report was that housing costs — described as “shelter” in the data — rose 0.7 per cent in September, as much as they had the previous month, and were up 6.6 per cent on an annual basis.

The persistence of high inflation has been a huge political challenge for the White House and congressional Democrats, overshadowing a swift recovery out of the pandemic with millions of jobs created since Joe Biden took office as president.

In a statement on Thursday, Biden acknowledged that Americans were “squeezed by the cost of living” and said there was “more work” to do to fight inflation even though some “progress” had been made. He said that if Republicans take control of Congress in November’s midterm elections, “everyday costs will go up, not down”.

Republicans have made rising prices a central part of their message to voters, blaming the Biden administration and tying the rise to the Democrat-led stimulus enacted by the president in March 2021 that injected $1.9tn into the US economy.

On Wednesday, several Republican lawmakers and candidates jumped on new figures showing that the producer price index, a measure of wholesale prices for businesses, rose faster than expected in September.

Rick Scott, the Republican senator from Florida who chairs the National Republican Senatorial Committee, said inflation was an “unbearable kick for families trying to get back on their feet” in his home state in the wake of Hurricane Ian.

US consumers have received some relief from the fall in petrol prices that occurred over the summer: the peak of inflation under Biden so far came in June, when CPI rose 9.1 per cent on an annual basis. But the administration and Fed officials would have liked to have seen the price increases fade more rapidly than they have.

Additional reporting by Joshua Franklin in New York