It comes as little surprise that prices for goods and services have skyrocketed amid record levels of COVID-19 stimulus, a labor supply shortage, and global supply chain bottlenecks. However, the rapid pace at which prices have increased has spooked investors.
- Inflation increased 6.2% from a year ago in October, marking the largest percentage increase in 31 years.
- Price gains in energy, food, and used cars were driven by record levels of economic stimulus, a labor supply shortage, and global supply chain bottlenecks.
- Markets are factoring in at least two interest rate hikes in 2022, despite the Fed insisting that it's in no rush to raise rates.
- Average hourly earnings in October decreased 0.5% when subtracting 0.4% growth from last month's 0.9% increase in inflation.
The latest figures released Wednesday by the U.S. Labor Department showed inflation surging 6.2% over the past 12 months in October, its highest percentage change in 31 years. Analysts polled by Dow Jones had expected a 5.9% increase in the consumer price index (CPI)—a metric that measures the change in prices of essentials, such as gasoline, groceries, healthcare, and rents.
Perhaps more concerning, CPI jumped 0.9% between September and October, well above the 0.6% increase forecast by economists. Meanwhile, core inflation, which excludes fuel and food, climbed 0.6% last month and 4.6% year over year, the largest rise since 1990.
Breaking Down the Price Hikes
Higher energy prices fueled much of the surge, with motorists paying 6.1% more at the gas pump in October and fuel oil prices soaring 12.3%. Analysts blame a combination of factors for the increase, including a supply/demand imbalance primarily caused by the pandemic.
Consumers did not get a reprieve at the grocery store either. Food prices continued to track higher, rising 0.9% sequentially and 5.3% from a year ago, with sizeable price hikes for meat, poultry, fish, and eggs.
Used vehicles also recorded an abnormal price increase, jumping 2.5% in October and a staggering 26.4% over the last year. Meanwhile, a global semiconductor shortage and more drivers on the roads were driving factors behind a near 10% jump in the cost of new cars and trucks.
Market Betting Against Fed
Although Federal Reserve Chairman Jerome Powell has indicated that the spike in inflation can be attributed to pandemic-related issues and remains adamant that there will be no imminent interest rate rises, the market is not as convinced.
According to the Chicago Mercantile Exchange's (CME) FedWatch tool, traders expect two rate increases in 2022, with a 44% change for a third hike. "Wednesday's Consumer Price Index showed
another month of inflation data well above the Federal Reserve's inflation target, primarily due to ongoing supply chain issues and labor shortages. If inflation doesn't subside, the Federal Reserve may need to taper at a more substantial rate and hike interest rates," Nancy Davis, founder of Quadratic Capital Management, told CNBC.
Tapering refers to policies that modify traditional central bank activities. Tapering efforts are primarily aimed at interest rates and at controlling investor perceptions of the future direction of interest rates.
Wage Growth: Not So Fast
Employment data last Friday showed wage growth inching 0.4% higher in October, raising hopes of a broader economic recovery from the pandemic. However, those hopes were tempered when taking inflation into consideration. Average hourly earnings actually decreased 0.5% if subtracting the 0.4% growth from last month's 0.9% increase in inflation. "For now, inflation is going to continue to run above very solid wage growth," said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council.
October's inflation reading creates a balancing act for the Federal Reserve as it carefully winds back pandemic stimulus while cautiously lifting interest rates to protect a recovering economy.