Warning of Persistent High Inflation... US Core Inflation Rises at Largest Rate in 40 Years

[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 concerns about entrenched high inflation. There is growing support for the view that giant steps (0.75 percentage point hikes) may continue not only in November but also in December to curb inflation.

◆ US 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 reached in June, it remains at a high level.

In particular, the rise in core CPI, which excludes 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 exceeds 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 item, energy prices stabilized as gasoline prices fell 3.9% month-on-month due to declining international oil prices, but housing, medical care, food, and other items maintained steep increases. The persistent upward pressure on inflation has strengthened concerns about entrenched high prices.

Housing costs, which account for 42% of the CPI, soared 6.6% year-on-year and rose 0.7% month-on-month. Considering there is about a six-month lag before rent costs are reflected in the index, many analyses suggest that housing costs will continue to support high inflation for the time being. The Wall Street Journal (WSJ) reported, "Housing costs make up the largest share of both the overall CPI and core CPI" and "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 though some key areas watched by policymakers, such as used cars and eggs, saw price declines.

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

The stronger-than-expected inflation pressure has bolstered the Fed's high-intensity tightening. This is the reason why a fourth consecutive giant step is expected at the November Federal Open Market Committee (FOMC) meeting, and why large rate hikes are anticipated to continue through December and early next year.

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

The minutes of the September FOMC meeting, released the day before, also confirmed participants' concerns about entrenched high inflation. The minutes pointed out that inflation was higher than expected and stated, "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 means that more aggressive rate hikes are necessary now to prevent much greater economic pain related to entrenched inflation.

Alongside this, some participants raised the so-called 'speed control theory,' suggesting that the pace of additional tightening should be slightly adjusted due to concerns about the cumulative impact of policies on the economy. However, the strong CPI release that exceeded market expectations on all fronts is seen 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 median year-end 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 also signal that rates could be raised 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. Just the day before, the peak was expected to be 4.6% in February.

Labor market indicators monitored by the Fed remain robust. The U.S. Department of Labor reported that initial jobless claims for the week of October 2-8 rose by 9,000 from the previous week to 228,000. Although this exceeded market expectations of 225,000, CNBC noted it still indicates that layoffs are not widespread.

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