As the September Fed Meeting draws near, investors are likely to be closely watching the latest US inflation data. The Consumer Price Index (CPI) showed a rise of 8.3% year over year in August. The data was a tad below expectations, but still a big jump from last year. Despite the data, investors are still betting on an increase in rates from the Fed.
Fed chairman Jerome Powell is concerned about the risk of inflation becoming entrenched. This can cause businesses and consumers to change their behavior to support higher prices. For example, workers may demand higher pay, forcing employers to pass higher labor costs onto consumers. That’s why many analysts believe the Fed would like to see six months of lower inflation readings.
While the data indicates inflation is under control, the Fed is wary of provoking a recession by raising rates. In fact, some analysts predict an early or late-year recession. However, Powell and other Fed officials have pushed back against this. Powell said that the Fed does not intend to create a recession, but a slowdown is a necessary ingredient in a lower-inflation recipe.
As for the Fed’s September meeting, markets have priced in a 75-bp rate hike. However, flash PMIs may influence the pace of future hikes. August’s PMIs showed a marked decline in business activity, which could slow down further. Also, housing data, such as building permits, may also impact the pace of further hikes. The September meeting will reveal how the Fed expects inflation to move in the coming months.
Although the US economy continues to perform well, investors remain cautious about the Fed’s policy. While the unemployment rate has fallen to a half-century low, these price increases have soured most Americans’ confidence in the economy. Meanwhile, Republicans are blaming the Biden administration’s $1.9 trillion financial stimulus package for causing inflation.
Inflation is still high, and this could affect the rate hikes the Fed makes. However, the Fed is adamant that it delivers price stability. It is not clear if it will do so this time, but the recent data are an important reminder of the urgency to fight inflation.
Despite recent positive news, the economy is still a fragile one. A prolonged downturn can reduce wage growth, and weak consumer spending can lead to a recession. Nevertheless, if the unemployment rate remains low, this could bolster consumer spending and reduce inflation.
Moreover, the data shows that the rate of inflation in the United States is increasing at a faster pace than the Fed had forecast. This is a significant sign of a broader-based price pressure in the economy. However, higher interest rates make borrowing more expensive. This could also have an impact on stocks.
While retail sales are still weak, the labor department reported a 4.2% monthly decline in August. Retail sales are a key gauge of consumer spending. They are a weakly correlated indicator and are generally not a good indicator of future inflation. Nonetheless, the Labor Department report suggests that consumers are unlikely to face a sharp slowdown before the mid-October general election.