Key Inflation Measure Accelerates Ahead of Next Fed Meeting

Consumer prices and wages are still climbing rapidly, new economic data released Friday shows, bolstering expectations that the Federal Reserve will press ahead in its campaign of interest rate hikes at its next meeting on November 1-2.

The Personal Consumption Expenditures price index (PCE) rose 0.3% in September on a monthly basis and 6.2% over the last year, the same rates recorded in August, the Bureau of Economic Analysis announced. Core PCE – an inflation measure favored by the Fed that strips out volatile food and energy prices – increased 0.5% on a monthly basis and 5.1% over the last year, with the annual number increasing in September from the 4.9% rate recorded in August.

A measure of wages tracked by the Labor Department rose, too, though at a slightly slower pace than in the previous report. The Employment Cost Index increased by 1.2% in the third quarter, and by 5.0% over the last year, down from the 5.1% annual rate recorded in the second quarter.

“The level of wage growth is still very high, even if it is moving in the right direction,” economist Laura Rosner-Warburton of MacroPolicy Perspectives told The New York Times.

Hard landing ahead? Analysts expect the Fed to again raise rates by 75 basis points next week, followed by a 50 basis-point increase in December. “The modest deceleration in wage growth is surely welcomed by the Fed but won’t prevent a 0.75 percentage point rate hike at next week’s FOMC meeting,” said economist Nancy Vanden Houten of Oxford Economics.

Some analysts now think that the Fed will have to push its benchmark interest rate to 5% or even higher in early 2023, though projections by Fed members last month showed rates topping out at about 4.6% and some investors are targeting a top rate of 4.8%. “Core PCE at 5.1% and an Employment Cost Index that remains elevated strongly implies a Fed policy rate that is going to need to move above 5%,” said Joseph Brusuelas, chief economist at the consulting firm RSM. “I expect peak in the policy rate by the end of Q1’23.”

Whatever the terminal rate, many economists are expressing concerns that the Fed will go too far, sparking a global recession, with 75% of economists polled by Bloomberg saying they are concerned more about over-tightening than under-tightening “Monetary-policy lags are still underestimated,” economist Thomas Costerg of Pictet Wealth Management told Bloomberg. “The full effect of current tightening may not be felt until mid-2023. By then, it could be too late. The risk of a policy mistake is high.”

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