[Summary] US Core Inflation Rises Most in 40 Years... Giant Step in December Too?

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Despite the Federal Reserve's (Fed) consecutive high-intensity tightening measures, the Consumer Price Index (CPI) continued its steep rise, surpassing market expectations. The core CPI for September, excluding energy and food, rose at the largest rate in 40 years, signaling warnings of entrenched high inflation.

To lower inflation, there is growing anticipation that the Fed will continue its giant step (0.75 percentage point hike) not only in November but also through December. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), supported the central bank's tightening, stating, "If tightening is insufficient to curb inflation, greater damage will follow." U.S. President Joe Biden declared, "Fighting global inflation that affects households is my top priority."

◆ U.S. September CPI up 8.2%... Core CPI posts largest increase since 1982

According to the U.S. Department of Labor on the 13th (local time), the September CPI rose 8.2% year-on-year and 0.4% month-on-month. These figures slightly exceeded Dow Jones experts' forecasts of 8.1% year-on-year and 0.3% month-on-month. Although the September CPI compared to a year ago is lower than the 9% peak in June, it remains at a high level.

Notably, the rise in core CPI, excluding energy and food, has intensified concerns about prolonged high inflation. The September core CPI surged 6.6% year-on-year, marking the largest increase since August 1982. This exceeded both the previous month's increase (6.3%) and market expectations (6.5%). The September core CPI also rose 0.6% month-on-month, surpassing the prior forecast of 0.3%.

By category, while energy prices stabilized with gasoline prices falling 3.9% month-on-month due to declining international oil prices, housing, medical care, food, and other items maintained steep increases. Persistent upward inflationary pressures have strengthened concerns about entrenched high inflation.

Housing costs, which account for 42% of the CPI, soared 6.6% year-on-year and rose 0.7% month-on-month. Considering the approximately six-month lag before rent costs are reflected in the index, analyses suggest housing costs will continue to support high inflation for some time. The Wall Street Journal (WSJ) reported, "Housing costs hold the largest weight in both overall CPI and core CPI," adding, "They have risen the most since the early 1980s."

Medical service costs also exceeded market expectations, rising 6.5% year-on-year and 1.0% month-on-month. Food prices increased 11.2% year-on-year and 0.8% month-on-month. However, used car and clothing costs declined month-on-month. CNBC noted, "Despite the Fed's active efforts, inflation is soaring," pointing out that inflation rose even as some key areas monitored by policymakers, such as used cars and eggs, saw declines.

◆ Fourth consecutive giant step likely, December too? ... Further rate hikes expected into early next year

The stronger-than-expected inflationary pressure has bolstered the Fed's high-intensity tightening. The Federal Open Market Committee (FOMC) meeting in November, where a fourth consecutive giant step is likely, as well as rate hikes through December and early next year, are expected to continue significantly.

Michelle Meyer, Chief U.S. Economist at Mastercard Economics Institute, emphasized, "The Fed has made it clear it is committed to price stability and doing its best to reduce inflationary pressures. The more inflation indicators exceed market expectations, the more they need to demonstrate that commitment. This means higher rates and economic cooling."

The minutes of the September FOMC meeting, released the previous day, also confirmed participants' concerns about entrenched high inflation. The minutes noted that after pointing out inflation was higher than expected, "Many participants worried that the cost of taking too little action to reduce inflation could be greater than the cost of taking too much action." This implies that more aggressive rate hikes now are necessary to prevent much greater economic pain related to entrenched inflation.

Additionally, some participants raised the so-called 'speed control theory,' suggesting a slight adjustment in the pace of further tightening to consider the cumulative impact on the economy. However, the CPI release, which exceeded market expectations on all fronts, is said to have weakened the minority opinion.

Previously, the Fed raised the benchmark interest rate to 3.0?3.25% with three consecutive giant steps at the September FOMC meeting and indicated a year-end median rate of 4.4% through the dot plot. Accordingly, the market had largely expected a 0.75 percentage point hike in November and a 0.5 percentage point hike in December.

The WSJ pointed out, "With the uncomfortably high September CPI, the Fed will implement a 0.75 percentage point hike in November," adding, "It may signal the possibility of raising rates to much higher levels through early next year." Immediately after the CPI release, the interest rate futures market increased bets that the Fed could raise rates to 4.9% by March next year, up from a previous expectation of 4.6% in February.

Labor market indicators monitored by the Fed remain robust. The U.S. Department of Labor reported that new unemployment claims for the week of October 2?8 rose by 9,000 to 228,000 compared to the previous week. Although this exceeded the market forecast of 225,000, CNBC noted it still indicates relatively few layoffs.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF)
[Photo by AP News]

◆ IMF Managing Director: "Inflation must not be left like a runaway train"... Biden also says "Price stability is a priority"

The IMF, which recently lowered its economic growth forecast, also supported the tightening moves by central banks including the Fed despite repeated warnings of economic slowdown. At a press conference during the IMF-World Bank (WB) Annual Meetings held in Washington DC, Managing Director Georgieva stated, "We cannot let inflation become a runaway train," emphasizing, "Central banks must take action." She stressed, "While rate hikes come at a cost to growth, failing to tighten enough to control inflation will result in higher and longer-lasting rates, causing greater damage to growth."

She also emphasized that fiscal and monetary policies must work together to respond to inflation. She warned against the possibility of countries pursuing expansionary fiscal policies, saying, "When monetary policy applies the brakes, fiscal policy should not step on the accelerator. That would be very dangerous." She explained that support policies to alleviate living cost pressures for low-income groups should be implemented while maintaining a tightening stance in line with monetary policy.

Furthermore, taking advantage of the annual meetings, she had "very constructive" meetings with UK Chancellor Kwasi Kwarteng and Bank of England (BOE) Governor Andrew Bailey, emphasizing, "Our message to the UK and everyone else is that fiscal policy should not undermine monetary policy." She added, "This could make monetary policy more difficult, requiring higher rates and tighter financial conditions," urging, "Therefore, do not prolong the pain and clearly implement consistent measures."

Ahead of the midterm elections in November, President Biden reiterated his commitment to price stability. In a statement released immediately after the U.S. Department of Labor's September CPI announcement, he said, "Americans are suffering from the cost of living," adding, "This is the main reason I ran for president." This reaffirmed the Biden administration's top priority of price stability. However, he also stated, "Thanks to my economic policies, the U.S. is in the strongest position among major countries facing this challenge," and warned, "If the Republicans take control of Congress, prices will rise." This is interpreted as a preemptive attack remark fearing that soaring inflation issues could disadvantage the Democrats in the midterm elections.

On the same day, the U.S. administration decided to raise Social Security benefits for retirees by the largest margin in 42 years. The U.S. Social Security Administration (SSA) announced it will increase the cost-of-living adjustment (COLA) for Social Security benefits starting next year by 8.7%. This increase is the largest since 1981. The adjustment is calculated based on the CPI, reflecting the recent surge in prices.

This content was produced with the assistance of AI translation services.