Inflation reading in the United States was higher than expected in September. This gives the Federal Reserve few choices.
Inflation in the United States remained stable in September compared to the previous month, data released on Thursday showed. This left economists baffled, with many expecting the Federal Reserve to raise interest rates one more time this year as a result.
Headline inflation, which measures the change in overall prices, remained stable at 3.7% from August, more than expected. On a core level, measuring consumer prices without food and energy, inflation declined to 4.1% from 4.3% in August.
Energy prices are what’s keeping American inflation high. Broad energy prices increased 3.3% on a yearly basis in September, mostly driven by a stable jump in oil prices in the Western world.
Since Saudi Arabia and Russia implemented their oil production cut, oil prices have been steadily increasing, hovering around $90 per barrel in September. Last Saturday’s attack on Israel by Hamas militants will likely make crude even more expensive.
On the other hand, lower core inflation points to the normalization of supply chains, whose output was disrupted by the Covid-19 pandemic. However, shelter continues to be the main driver in core prices. House ownership and rent remain a highly costly endeavor in the United States, especially as most Americans are running out of pandemic savings.
The Interest Rate Dilemma
Despite inflation and high interest rates, US markets remained overall optimistic throughout 2023, mostly thanks to new investments in the artificial intelligence sector.
However, many analysts are worried that markets are significantly overpriced, and are just a bubble ready to burst. As a matter of fact, the Federal Reserve has hinted at caution many times, with markets looking the other way.
At their September meeting, Fed chairman Jerome Powell said very clearly that rates will remain “higher for longer”, and another hike was likely in 2023. The Federal Reserve targets inflation at 2% and is planning to reach it in a matter of years.
The latest inflation data leaves the Federal Reserve with no choice. Another hike must be made and rates must remain high, even if that risks a recession. Economic contraction in 2024 would be especially consequential because of the US presidential elections.
"This reading is not going to change the broader messaging from the Fed as we move towards the November rate decision,” said the head of US economics at Fitch Rating, “Housing inflation will need to decline sharply over the coming months for us to see inflation near 2%.”
The question is not whether or not the Fed will raise rates. The question is whether or no the American economy will be able to absorb the hit. If it doesn’t, US president Joe Biden will be looking at a much gloomier presidential election.
