After a week in which reports show the labor market remains resilient in the face of higher interest rates, the markets and the Federal Reserve will turn their attention this week to their favorite topic du jour: inflation.
On Wednesday, the Bureau of Labor Statistics will issue its September report on producer prices, or wholesale inflation, while the next day comes the more commonly known consumer price index. Economists and others will be looking to see whether there is any letup from August, when the PPI registered an annual rate of 8.7% and the CPI 8.3%. Expectations are for both to dip modestly.
But that will be hardly enough to deter the Fed from its aggressive regime of tightening monetary policy. The central bank has already raised interest rates by 75 basis points three times in a row and another similar hike cannot be ruled out in November, although a smaller increase is possible while the Fed sees how its actions are affecting the economy.
Although jobs are plentiful and companies remain in a hiring mode, last week the government reported that openings dropped by more than 1 million in late August, though there are still 10.1 million jobs available, a rate that equals 1.7 jobs for every potential worker.
Political Cartoons on the Economy
“With the unemployment rate back down to a half-century low in September, the Fed is wholly focused on controlling inflation – making the releases of the September PPI report on October 12 and CPI report on October 13 the coming week’s most important economic releases, Comerica Bank Chief Economist Bill Adams wrote on Friday following the monthly jobs report that showed employers added 263,000 workers in September.
“Increases in durable goods prices are likely to slow in both reports, but shelter cost inflation will likely stay very high,” he added.
Although rents remain high, home sales have fallen by nearly 25% from a year ago as the Fed’s tightening of interest rates has brought mortgage rates to double what they were in 2021.
And while consumer spending has held up, there has been a noticeable shift in the buying patterns of consumers away from big ticket goods like furniture and appliances towards services like going out to eat or health care.
Inflation has softened a bit, with prices for items such as used vehicles and construction commodities declining, along with gasoline prices. But the cost of groceries continues to climb at double-digit levels.
Last week, the latest Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker found that the percentage of Americans who believe inflation will go up has dropped since early September, down 6 percentage points for inflation overall, 8 points for bills and 5 points for taxes.
However, the majority of Americans also expect their bills (55%) and taxes (51%) to go up.
“We do not expect the September CPI report to deliver an “all-clear” signal on inflation that would warrant Fed officials to pull back from their current pace of rate tightening,” Wells Fargo economists wrote on Sunday.
“The outlook for energy and food prices remains fraught in the current geopolitical environment, and while the stage is set for core inflation to ease on trend in the coming months, there remains significant ground to cover in returning inflation back down to officials’ preferred 2 % target,” they added. “Fed officials are likely to remain cautious in their assessment of inflation, and therefore likely to continue with their aggressive rate tightening pace for the remainder of the year.”