The September Consumer Price Index report just confirmed what most Americans already knew: shopping for goods is getting more expensive.
After two months of holding steady, inflation jumped 3.4% last month. Core CPI, which excludes the gas and energy prices that have spiked since the start of the Iran War, also jumped 2.6% from a year ago, up from the 2.4% rate it registered in August. Economists were expecting a 2.5% rate. Meanwhile, the Bureau of Labor Statistics says gasoline prices accounted for more than half of the monthly increase, with a 9.1% rise.
Also read: Hot September CPI numbers, possible Fed rate hikes spark anxiety for midterm voters
Now, Wall Street is bracing for the other shoe to drop from the Federal Reserve, which has one tool to curb stubborn inflation, and that is to raise interest rates.
¨September’s CPI numbers were a bucket of cold water for dovish hopes,¨Daniela Hathorn, senior market analyst for Capital.com, told TheStreet. ¨In fact, the data breakdown shows that core services continue to be a bigger contributor than energy, which is particularly uncomfortable for a central bank focused on bringing inflation back to 2%.¨
According to Hathorn, this fact ¨all but confirms that the Federal Reserve is going to hike rates again, possibly even at the meeting in two weeks.¨
But analysts at Truflation say that increasing rates would be a mistake.
Fed rate hike right now would be a mistake
Truflation is a real-time inflation data provider that tracks more than 15 million live price points a day across over 40 commercial and public data sources.
For them, the greatest concern about inflation right now isn’t that the headline inflation number is accelerating; it’s that the gap between the core and headline numbers is widening.
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¨That reinforces the view that energy is leading and putting pressure on headline inflation. If this continues, it will undoubtedly put pressure on core in due course,¨Truflation said in its own September CPI Inflation report that was shared with TheStreet.
Despite those concerns, however, the firm sees increasing interest rates as the wrong lever for the Fed to pull.
¨If you look purely from an inflationary standpoint, there’s no reason for the Fed to hike. It isn’t addressing the fundamental supply-side pressures driving inflation at the moment,¨the report stated. ¨A further hike in interest rates won’t address the supply-driven inflation at the moment, and it won’t directly resolve the energy or import supply shocks.¨
Instead, the Federal Reserve should wait for the Iran War fighting to calm down (however long that may take) so the economy can naturally see inflation ease without intervention.
Bond yields have soared in recent months.
Raising rates comes with risks, especially to tech
Hathorn notes that the initial market reaction to the hotter-than-expected CPI report was expected as yields and the dollar rose while equities and gold dropped.
This dynamic presents an issue for the Fed.
Related: Inflation likely worsened in September, according to Goldman Sachs
¨With long-term yields already at multi-decade highs, the question was whether there would be further appetite to take the rate higher, or if such high yields would attract new buyers. So far, the latter seems to be the case,¨Hathorn said.
Meanwhile, for equity markets, the headwinds haven’t changed. Concerns about disappointing guidance on AI returns are at the forefront of the market’s mind, and if borrowing costs become more expensive due to a rate hike and inflation continues to threaten profitability, equity markets could get nervous.
¨As a result, tech companies have a lot to cover over the coming weeks if they want to continue to sustain the broader market. As the current state of play stands, a disappointing earnings season for Big Tech and hyperscalers could prove very expensive for global stock markets as breadth has become extremely narrow,¨ Hathorn said.
