New York, Frankfurt Inflation in the US fell slightly in September. The inflation rate was 8.2 percent, as announced by the US Department of Labor on Thursday in Washington. That’s down from August, when it was 8.3 percent. However, economists had expected a somewhat sharper decline to 8.1 percent in September.
Also disappointing: Compared to the previous month, prices rose by 0.4 percent, compared to an increase of only 0.2 percent.
This is also confirmed by the so-called core inflation, which excludes the strongly fluctuating prices for energy and food: It was 6.6 percent in September after 6.3 percent in August. This shows that the pace of inflation has not yet clearly slowed down.
Shortly after the figures were published, the Dax turned negative from a plus of around 1.4 percent and lost almost 300 points. The US markets also started trading with significant losses. The yield on 10-year US government bonds rose to over 4.5 percent.
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US economist Mohamed El-Erian called the inflation numbers “ugly” on Twitter. They were once again higher than expected. He sees this as “bad news” for the US Federal Reserve and markets. Even more jocularly, however, this is “for the economy and especially for the most vulnerable sections of society”.
High inflation is currently the key issue in the US ahead of the congressional elections in early November. A significant easing of the price pressure is not yet foreseeable, even if inflation has fallen somewhat since its preliminary high of 9.1 percent in June. Most experts therefore assume that the US Federal Reserve (Fed) will continue to tighten its monetary policy.
“Today’s numbers confirm Fed officials’ fears that inflation is more stubborn than previously expected,” says Commerzbank economist Bernd Weidensteiner. He expects US inflation to fall only slightly over the next few months, even if energy prices calm down.
Inflation ahead of congressional elections top concern
US politicians are also watching the numbers closely. After all, inflation is at the top of Americans’ list of concerns just weeks before the November 8 congressional elections. In a recent survey by Monmouth University, 82 percent of voters surveyed said that price increases were an extremely or very important issue for them. This puts the topic first – ahead of crime.
For US President Joe Biden, the latest inflation figures are already the second hit within a week: Just last week, the oil association Opec+ announced that it would produce significantly less oil from November. This means higher world market prices and thus also higher gasoline prices in the USA.
On the other hand, the higher-than-expected inflation comes in handy for the Republicans during the election campaign. Because they are already exploiting the higher prices for food and gas as an argument against Joe Biden. They accuse the President of unnecessarily fueling the economy with his stimulus packages and of not doing enough now.
In August, Biden signed a $370 billion anti-inflation bill into law to fight inflation. It includes measures to protect the climate as well as price controls for medicines. However, it may be months or even years before these measures become noticeable to the public.
Historically, resentment about the economy is always reflected in votes against the incumbent government. This is bad news for the US President.
Commerzbank economist Weidensteiner sees the high core rate as a warning signal, which reached a 40-year high of 6.6 percent. It is considered by economists to be a good indicator of the medium-term inflation trend. Weidensteiner assumes that inflation will remain well above the Fed’s target of two percent for some time to come.
Energy prices, which were considered the main drivers of inflation until the summer, have been falling significantly since July compared to the previous month. In September they weakened by 2.1 percent compared to August.
US economist Jason Furman from the Peterson Institute in Washington sees this as a major difference to Europe. The price surge in Europe in recent months is largely due to higher gas prices. In contrast, core inflation in the USA is significantly higher.
Fed signals further sharp rate hikes
Even before the inflation figures were published, the central bank had signaled further drastic interest rate hikes. This is indicated, among other things, by the minutes of their September meeting published on Wednesday. It says: “Many participants stressed that the costs of doing too weak an approach probably outweigh the costs of going too strong.” The representatives therefore agreed that they must raise interest rates to a level that slows down the economy more.
The strong US labor market figures for September have recently supported the expectation of stronger interest rate hikes. The unemployment rate fell to 3.5 percent, reaching its pre-pandemic low.
Currently, there is an average of about one applicant for every two job advertisements in the USA. The tight labor market, in turn, increases wage pressure and fuels the risk of a wage-price spiral in which higher prices and wages reinforce each other.
US investment bank Goldman Sachs expects the Fed to hike interest rates by 0.75 percentage points at its next meeting on November 2nd. After that, she expects further rate hikes of 0.5 percentage points in December and a quarter of a percentage point in February. This would mean interest rates rising to between 4.5 and 4.75 percent by then. This is also roughly in line with the predictions of Fed members, who recently assumed on average that they would peak in 2023 at 4.6 percent.
However, the foreseeable further interest rate hikes also make a longer-lasting recession more likely. Because with higher interest rates, the still booming economy could cool down more and more jobs could be lost than previously expected.
More: Inflation in the euro area rises to a new record – three countries over 22 percent