WASHINGTON – Inflation pushed a further increase in the economy in October, challenging the Federal Reserve's outlook for only transitory price increases, offsetting recent wage hikes in a blow to consumers, and causing investors to make bets that the central bank will raise interest rates sooner than expected.
The yield on two-year Treasury notes, which is a proxy for the outlook for the overnight interest rate set by the Fed, jumped 6 basis points, the most in three weeks, and was among the largest daily increases in the last year and a half, up to 0.485% on Wednesday after the release of data showing consumer prices increased by 6.2% in October against the year before.
The Fed has expected the pace of price increases to ease alongside bottlenecks in global supply chains, as well as food, energy, and rent, as well as automobiles, where price increases are expected to be the largest one-year jump in 30 years.
The impact of one-time spikes in goods and services are rising as inflation measures remain overruns those bottlenecks, but those bottlenecks are overrun by strong U.S. consumer demand.
Both the Fed and Cleveland Fed trimmed the middle index of consumer prices, and the median level of price increases, surged in a sign that price pressures were rising across a more extensive set of goods and services.
Still, one Fed policymaker on Wednesday said the central bank should still remain patient.
It is important to see how this percolates through the economy before changing monetary policy in response to it, said Mary Daly, the Fed President of San Francisco, on Bloomberg TV.
Markets had a shorter leash. Pricing in futures contracts tied to the target federal funds rate showed investors boosting odds the Fed will by September raise rates twice by a cumulative 0.50 percentage point. In December, expectations for a third quarter point rate increase increased to nearly 50% compared to less than 30% on Tuesday.
The risks coming from inflation have become increasingly important to Federal Reserve policymakers, since excessive accommodation for too long or essentially running the economy hot, could well hold unintended market consequences that could further erode confidence and eventually impair the recovery, said Rick Rieder, chief investment officer for global fixed income at Blackrock.
near-term inflation readings may be intimidating to "inflation fighters" with demand, supply and wage pressures expected to continue. Central bankers could be able to discuss a faster reaction function, which could press central bankers to at least discuss a faster reaction function. What was an Adamant faith in transitory inflation for both the Fed and the Biden administration has been tempered.
We know that the recovery from the epidemic will not be linear, Biden's Council of Economic Advisers said on Twitter that prices rising faster than anticipated. The CEA will continue to monitor the data as they come in, the office said.
The price rising has had the disconcerting effect of a higher wage increase that the Fed and White House hoped would flow to lower- paid workers in the hotels, restaurants and other industries that had been hardest hit during the pandemic shutdowns last year and the cautious return to in-person services since then.
In October, Nick Bunker, research director for North America, said that inflation almost fully offset the strong wage increases seen in the leisure and hospitality industry.
The 5% wage gain of the past 12 months was more than offset by the rise in prices, as real hourly wages fell 1.2% in October, compared to the year before, with the 5% wage gain of the past 12 months more than offset by the rise in prices.
That continues reversing what had been a steady rise in workers" purchasing power since around 2013, with the benefits of low inflation boosting real wages after several years of stagnation following the 2007 - 2009 financial crisis and recession.
The Fed is reluctant to raise interest rates until more people return to jobs after being sidelined during the pandemic, even if inflation runs above its formal 2% target for some time. The jobs-first strategy is a change from the previous approach which tried to use higher unemployment as a way to keep prices under control - in effect imposing costs of inflation-fighting on those jobless during economic slowdowns.
The Fed hopes that inflation will be easing over time without the need to ratchet interest rates higher to cool the economy, and risking slowing or reversing job growth in the process.
The longer inflation data run beyond expectations will be the tougher it will be.
Is this enough to force the Fed s hand with annual inflation topping 6%? There has been a long, long transitory period that has to heap pressure on the Fed, said Seema Shah, chief strategist at Principal Global Investors.