Gasoline, housing prices raised October’s inflation. What it means for the Fed

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A gas pump at an Arco gas station in San Diego, California.

Mike Blake | Reuters

The October consumer price surge was driven by a number of factors that may continue. Market pros say the Federal Reserve may be forced to postpone the timeline of its ultimate inflation-fighting tool: rate hikes.

The consumer price index rose 0.9% on a monthly basis and rose 6.2% year over year, the fastest pace in 30 years. According to the Dow Jones, economists had expected an increase of 5.9%. Excluding food and energy, the year-on-year increase was still high at 0.6% and 4.6%, respectively.

The CPI measures inflation based on a basket of goods from rentals and groceries to gasoline and medical services. Following Wednesday’s October report, government bond yields rose and markets began pricing in more aggressive Fed tightening or rate hikes.

The Fed Fund futures market showed that traders had a higher chance of the central bank starting the rate hike in July rather than September. Traders expect a further increase by next December and at least three more in 2023.

“The real risk is that they will move faster than they did in September … and the market is pricing in a faster move. And until today we actually thought that the market was ahead of itself, ”said Michael Englund, chief economist at Action Wirtschaft.

“If you get a few more numbers like this, then not only is inflation not slowing down, it is accelerating,” he added. “If it continues to gain momentum, there could be more panic in the first quarter given the events of December, January and February. We already know that, based on our experience so far, we will have big price gains in November. “Seen in gas prices.”

But Englund said the Fed will likely be more cautious next year. Fed chief Jerome Powell’s term of office expires early next year. Even if he is not nominated, his possible successor, Fed Governor Lael Brainard, is considered a dove.

“We continue to believe that they will try to hold the line as long as possible,” said Englund.

Economists said inflation has broadened and therefore risks are becoming more persistent.

Diane Swonk, chief economist at Grant Thornton, said she didn’t expect inflation to peak until early next year.

“I still think we’ll get out in the first quarter. It’ll get worse before it gets better. The comps won’t play until the spring,” she said. “It’s not a pretty picture at the moment.”

Some factors, like semiconductor shortages, might fade. But this is precisely what is clearly evident in car prices, as the lack of chips has made it impossible for automakers to keep pace with demand.

Used car prices again made a strong contribution to the CPI, increasing by 2.5% compared to September and 26.4% year-on-year. New car prices rose by 1.4% monthly and by 9.8% over the past 12 months.

Swonk says higher inflation could lead the Fed to accelerate the reduction of its $ 120 billion monthly bond purchase program. That would free the central bank to hike rates faster next year.

Boiling oil

Gasoline is one of those areas where it could be hotter than expected and for longer periods of time. Consumers across the country are feeling the rise in fuel costs. According to the AAA, a gallon of regular unleaded lead was $ 3.41 on Wednesday, $ 1.30 more than a year earlier.

Francisco Blanch, head of global commodities and derivatives strategy at Bank of America, said oil could hit $ 120 a barrel by next year. On Wednesday, a barrel of West Texas Intermediate crude was trading at $ 81.34.

Heating oil prices rose 12.3% in October and rose 59.1% last year, according to the CPI report. Energy prices rose by a total of 4.8% in October and by 30% over the 12-month period.

“I think we are in a world full of contradictions and oil is at the center of many contradictions,” said Blanch. “Oil has been the biggest straggler in energy. Every single commodity has skyrocketed in the past 18 months and oil has fallen back to $ 80.”

Blanch said demand could continue to drive prices higher, and consumers of natural gas have replaced oil as prices for that commodity rise.

“The thing about oil is that we are going to have a major resurgence in international travel,” he said. International flights are just beginning to recover and the demand for oil will rise as airlines buy more kerosene.

“It could be 1.5 to 2 million barrels [more demand] by the middle of next year, “said Blanch. But then he expects prices to fall in 2023.” I think at some point we will start to curb demand, “he added.

Swonk said Hurricane Ida, which stalled some US oil and gas production for weeks, also had an impact on price. “Hurricane Ida clearly made it worse. A lot of other things are happening here too: Covid, climate change, demand surge,” she said.

Payment of rent

Another area that is likely to get even hotter is the cost of housing, which is around a third of the CPI and has been relatively subdued so far.

JPMorgan economist Daniel Silver notes that there have been big leaps in key rental rates, and industry data suggests there could be more increases.

“Tenant rents rose 0.42% in October, a little less than in September, but still one of the strongest changes in decades,” he wrote. “Owners’ equivalent rent rose 0.44% in October, a touch above the increase in September and the largest monthly increase since 2006.”

According to Apartment List, national median rents have risen by 16.4% since the beginning of the year.

Swonk said housing has not yet returned to pre-Covid levels. “Housing construction could add over half a percent to headline inflation next year and even more to the core. That’s a third of the total CPI, but it’s actually bigger, ”she said.

Wage spiral

Workers’ wages have soared this year, but not as much as inflation. Economists said they expect further wage increases that tend to be sticky – that is, costs that won’t go down easily for employers.

It is also an area that can be included in the rising cost of other vital things like housing.

Average hourly wages rose by 0.4% in October, nowhere near the 0.9% jump in inflation.

“It’s not a wage price spiral like it was in the 1970s or 1960s, but you could go through a period of time where you have a temporary wage price spiral that gives it more longevity than we’d like,” said Swonk.