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The Federal Reserve has taken drastic measures against inflation with rapidly rising interest rates for months, but their efforts are barely noticeable.
September CPI data on Thursday showed little to no change from March when the Fed began to tighten.
Total consumer prices rose 8.5% year-on-year.
Today, consumer prices are up 8.2%.
In September, core prices rose 6.6% annually, a level last seen in 1982.
Christopher S. Rupkey, the chief economist at Fwdbonds, an economic research firm, wrote:
“This inflation report today was an unmitigated disaster. It shows whatever Fed officials are doing, it is just not working.”
The Fed doubled down on its plans to squeeze inflation out of the US economy by any means necessary.
They have implemented massive rate increases to dampen the demand for goods and services.
Despite rising interest rates, there is virtually no sign of price easing.
Regardless, the Federal Reserve is stoic in its decisions, betting that the country’s strong labor market can tolerate the stress of higher borrowing costs.
“The Fed will see this as a license to stay aggressive,” said Jan Szilagyi, the CEO of investment research firm Toggle AI.
Thursday’s inflation report is the last extensive economic overview Fed politicians will take before their next meeting in early November.
The report once again guarantees an interest rate hike of 0.75%.
Investors currently have a 97% chance of a fourth consecutive three-quarter percentage point increase.
Read also: Federal Reserve raises interest for the fifth time in 2022
The Federal Reserve seeks to maintain interest rates to ensure price stability.
Fed Chairman Jerome Powell acknowledged that the broader impact of rising borrowing costs would inflict financial pain on households and businesses.
The Fed recently engaged in a mantra to hurt now rather than letting inflation seep into the psyche of consumers.
In the latest meeting on Wednesday, Fed officials pointed out that the cost of insufficient action to curb inflation was more significant than the cost of too much action.
The belief indicates that the Fed would drive the US economy into recession rather than a downward inflation spiral.
Meanwhile, consumers are enduring the pain of high prices and high borrowing costs.
The struggle may also intensify with job losses.
The Federal Reserve believes that the strong labor market has contributed to inflation.
They also cited other factors beyond their attribution, including supply chain disruptions, the war in Ukraine and companies raising prices when costs fall.
Kurt Rankin, Senior Economist at PNC, said:
“Rather than walking a tightrope between a ‘soft landing’ and recession…the Fed now faces the potential of killing off the economy’s job creation impetus beyond a simple rebalancing of the labor market in the name of taming inflation.”
The fight against inflation
In the fight against inflation, the Federal Reserve faces an uphill battle.
The effects of interest rate hikes should be felt in the real economy within a few months.
Fed Vice Chairman Lael Brainard said:
The moderation in demand due to monetary policy tightening is only partly realized so far.”
He noted that the “transmission of tighter policies” is most evident in the housing market, with mortgage rates more than doubling this year.
“We continue to see a tale of two economies in the data,” chimed in Sam Khater, the chief economist at Freddie Mac.
“Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”
Read also: After six consecutive weeks of surging prices, mortgage rate finally eases down
The recent CPI reports bring economists and investors back to reality, where millions of Americans feel deeply about spending more on necessities like food and shelter.
More and more people are managing inflation by relying on credit cards, which are becoming harder to pay off as interest rates rise.
The Food at Home index rose 13% year-over-year last month.
Meanwhile, emergency shelters grew by 6.6%, the fastest in over three decades.
Despite rising mortgage rates, housing costs have become more brutal, according to RSM Chief Economist Joe Brusuelas, who also said:
“Whatever relief in core inflation that is in the pipeline… it is not flowing through to an easing in rents.”
According to Rupkey, rate hikes have won the battle against falling commodity prices but are losing ground to service sector price increases.
“Today’s red hot inflation report brings the economy closer than ever to recession next year,” said Rupkey.
“Supply chain bottlenecks, a volatile global energy market, and rampant corporate profiteering can’t be solved by additional rate hikes,” said Rakeen Mabud.
Mabud is the chief economist of the left-leaning Groundwork Collaborative policy group.
“It’s time for Chair Powell and the Fed to step aside and for Congress to step in.”