The recent decline in inflation in the United States has come to a halt in September, indicating that a complete victory in the war against inflation still requires some twists and turns.
The good news is that compared to the 40 year high set last year, price increases have significantly slowed down, especially the core inflation indicator that measures the basic inflation situation, which does not include volatile food and energy prices.
But the bad news is that after a significant slowdown earlier this summer, the core inflation rate slightly accelerated last month.
This latest inflation data highlights a risk that, without further economic slowdown, the inflation rate may stabilize at around 3%. Although far below the astonishing high inflation rate that prompted the Federal Reserve to launch a series of rapid interest rate hikes last year, it is still higher than the 2% inflation target set by the Federal Reserve.
The US Department of Labor announced on Thursday that the Consumer Price Index (CPI) in September increased by 3.7% compared to the same period last year, the same increase as in August, but much lower than the 9.1% increase in June 2022. The core CPI increased by 4.1% year-on-year, lower than the 4.3% increase in August. But in September, the core CPI rose by 0.3% month on month for the second consecutive month, accelerating the increase again compared to June and July.
Federal Reserve officials have recently hinted that they are likely to keep short-term interest rates unchanged at their next meeting from October 31 to November 1, as the rise in long-term interest rates over the past month may slow down the growth of the US economy. In fact, if the rise in borrowing costs continues, it will serve as a substitute for interest rate hikes.
The yield of 10-year US treasury bond bonds rose 0.115 percentage points to 4.71% on Thursday. The yield of the treasury bond is still below the 16 year high set last week. The Dow Jones Index closed down 174 points, or 0.51%, on Thursday.
Never claim victory
If there is stronger evidence that price pressures and economic activity are cooling, Federal Reserve officials may feel more reassured about the decision to keep interest rates unchanged. As a result, they are unlikely to signal an indefinite suspension of interest rate hikes, nor are they likely to rule out the possibility of a rate hike in December. The last time Federal Reserve officials raised interest rates was in July, which raised them to their highest level in 22 years.
Federal Reserve Chairman Jerome Powell emphasized in September that officials will use new economic data as the basis for monetary policy after deciding to keep interest rates unchanged. Although the Federal Reserve uses another inflation indicator, the CPI report received wider attention as it was the first inflation data released. Before the next meeting, Federal Reserve officials will receive more data on corporate employee salaries, as well as the preferred inflation indicators released by the US Department of Commerce.
Of course, the Federal Reserve can claim to have made some progress in inflation, "said Lara Rham, chief US economist at FSInvestments. But they must not claim victory
Federal Reserve officials hope to see core prices continue to cool, especially in the service industry; Compared to the relationship with commodity prices, the relationship between service industry prices and labor costs is often closer.
Wage growth continues to put pressure on inflation
Many Americans have not received much comfort from the slowdown in inflation, as since 2021, the price increases in everything from cars, restaurants to housing have been exceptionally high.
The price increase of labor-intensive services last month may exacerbate concerns that the hot labor market will maintain higher inflation rates. In September, restaurant price increases expanded for the second consecutive month. The prices of hotel accommodation and sports events have also significantly increased.
Manufacturer Columbia MachineWorks in Tennessee has significantly increased wages in the past two years to retain and attract skilled employees to manufacture and repair industrial machinery.
Jake Langsdon, the company's vice president and now 28 years old, said that although other expenses, including water and electricity, are also rising, the biggest impact on the pricing of this nearly century old company is still labor costs. Langsdon is the great grandson of the company's founder.
Langsdon talked about the dilemma faced by the company and said, "When I was forced to raise prices, was my pricing just right or too high?" He said, "You can't pass on 100% of the cost of inflation to customers; customers will be dissatisfied with you... you have to absorb a portion of the cost
Langsdon estimates that Columbia's labor costs have increased by 20% -25% in the past few years, due to salary increases and increased benefits. In recent years, the number of employees in the company has remained stable at around 70.
Langsdon said, "Many companies are competing for a very small labor pool, and there are not many new workers joining
Due to the unemployment rate being below 4% and the lack of a significant increase in layoffs, workers have not yet lost all the chips they gained during the post pandemic economic recovery. The strikes by members of the United AutoWorkers and Kaiser Permanente healthcare system employees, as well as recent significant wage increases in other union contracts, may drive a comprehensive increase in worker wages.
This may maintain pressure on basic service prices, which are one of the last areas where performance remains unsatisfactory, "said Carl Tannenbaum, Chief Economist of Northern Trust Co. (NTRS) in North America.
The Federal Reserve may adopt a wait-and-see attitude
According to data from the Energy Information Administration, the increase in gasoline prices in the United States narrowed in September and has declined in recent weeks. Gasoline prices may rise again due to this war in the Middle East; This war pushed up oil prices earlier this week.
The Federal Reserve is not particularly concerned about commodity prices that are less sensitive to interest rate changes, but the rise in gasoline prices may undermine consumer confidence and spending, and penetrate into the costs of other products such as air tickets and shipping.
The prices of groceries have continued the sluggish trend of the past few months, keeping pace with overall inflation over the past year.
It is expected that housing costs will alleviate overall inflation in the coming months, as the impact of the Federal Reserve's interest rate hike has a long lag time in the data. Housing costs continued to intensify price pressure in September, increasing by 0.6% compared to the previous month.
The prices of second-hand cars have significantly decreased, after soaring after reopening during the epidemic period, when the supply chain was disrupted. In the past year, second-hand car prices have decreased by 8%.
The Federal Reserve has raised short-term interest rates multiple times to curb inflation by slowing economic growth. This process aims to drive up long-term bond yields, thereby increasing the borrowing costs for purchasing housing, cars, and other large commodities.
The financial markets are tightening, and this situation is beneficial for our work, "Federal Reserve Governor Christopher Waller said at a meeting in Utah on Wednesday. In such a situation, we can watch and see