- Already at a 30-year high, inflation could approach 7% soon
- Fed faces growing rate pressure; Biden spending plans at risk
After U.S. prices climbed by the most in three decades, there’s even worse news ahead for households and policy makers: Inflation likely has further to rise before it peaks.
October’s annual rate was 6.2%, the highest since 1990, as price increases spread well beyond the parts of the economy most disrupted by pandemic closures. Key drivers, like hot housing markets and a global energy crunch, show few signs of fading away soon -- leading economists to predict even bigger jumps in the coming months.
Across the Board
Beyond the usual suspects for pandemic inflation -- like gasoline and cars -- October saw rapid price increases almost across the board
“We’re going to see the inflation picture get worse before it gets better,” said Sarah House, senior economist at Wells Fargo & Co. She doesn’t expect much relief before next spring.
For the Federal Reserve, and President Joe Biden, that likely seems a long way off -- and pressure for a change of policy course will ratchet up in the meantime, as calls to rein in pandemic support grow louder.
‘Tipping Point’
Surging prices are eating into family budgets, wiping out the wage increases that U.S. workers have battled for after last year’s jobs wipeout, and squeezing profit margins for small businesses.
The Fed has already begun to back away from the case it’s been making since Covid-19 first arrived: that pandemic inflation will be “transitory.” It’s starting to wind down bond purchases this month, and leaning toward raising interest rates next year instead of waiting until 2023. Wednesday’s inflation data could accelerate the timetable.
The U.S. central bank may have arrived at a “tipping point,” said James Knightley, chief international economist at ING. “Is it really justifiable to be continuing to stimulate when you’ve got the economy growing at 6% and inflation increasing at 6% and no sign that there’s any loss of momentum in either of those indicators?”
Knightley expects the Fed’s so-called taper to be concluded in the first quarter of 2022 -- about three months ahead of the consensus schedule. And he foresees two 25 basis-point rate hikes to follow by the end of the year, with a growing likelihood that could turn into three.
That’s roughly what financial markets expect too. Investors have been betting on a speeded-up hiking cycle for nearly two months. After Wednesday’s inflation numbers, yields on five-year Treasuries rose more than 10 basis points.
Not the 1970s
An acceleration of the timetable could show up at next month’s meeting of the rate-setting Federal Open Market Committee, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. Last time the Fed released a so-called “dot-plot” in September, it showed an even split on whether rates will rise next year.
“It is reasonable to suspect you could get the median to move higher,” Feroli said.
“We expect headline inflation may top 6.8% year on year in November. The main factors would be persistent price gains for energy and shelter and adverse base effects.”
“While the bar for accelerating the pace of Fed taper is extremely high and the central bank is unlikely to do so, today’s release -- and the readings in the rest of the year --likely would put them in a very hot seat.”
Anna Wong, Bloomberg Economics
Fed officials acknowledge that inflation is sticking around longer than they’d expected. They fret that households and businesses may come to expect more of the same, the kind of change in expectations that can prove self-fulfilling. But they still reckon many price increases are essentially a one-off.
There’s no reason why the energy spike of 2021, or the big shift in housing markets driven by work-from-home, should repeat themselves in future years, the argument goes. And labor isn’t strong enough to keep bidding wages up like it did in the 1970s.
That’s why there’ll be plenty of resistance inside the Fed to any abrupt shift toward tighter policy.
“Inflation is high, it’s eye-popping,” Mary Daly, president of the San Francisco Fed and one of the central bank’s most dovish officials, told Bloomberg TV on Wednesday. Still, “right now it would be premature to start changing our calculations about raising rates,” she said. “Uncertainty requires us to wait and watch with vigilance.”
‘Tight Spot’
Biden, whose party suffered areversalin state elections last week and must defend thin Congressional majorities in mid-term voting next year, is in the firing line too. Inflation is high on the list of public grievances, and the president called it a “top priority” after Wednesday’s data.
One problem for Biden, as he tries to get a $1.75 trillion social-spending plan through Congress, is that he needs votes from centrists like Senator Joe Manchin of West Virginia -- who’s voiced concerns that more public spending could make inflation worse. On Wednesday, Manchincalled for actionagainst soaring prices, without saying what kind.
Still, it’s the Fed -- which is supposed to be responsible for managing inflation -- that’s more directly in the firing line.
In the last couple of years the central bank has come up with a new policy framework, essentially allowing it to keep rates lower even when inflation stays a bit above the 2% target, and rolled out emergency programs to dig the economy out of a deep pandemic hole.
Through all of this, it’s stressed the importance of accommodative monetary policy to boost employment and growth, and allow wages -- especially for low-income Americans -- to keep rising. But those arguments, drawn up in a world where inflation rarely got near 3%, are getting harder to sustain at 6% plus.
“The fact that inflation is off the business page and on the front page is a problem for an institution trying to preserve its reputation,” said Feroli. “They are in a tough spot.”
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