Rising inflation raises fears of a hard landing for the US economy
Hopes that the Federal Reserve could stage a soft landing for the U.S. economy took a hit on Tuesday when a crucial measure of inflation beat forecasts and triggered a sharp sell-off on Wall Street.
The consumer price index rose 0.1% in August, above economists’ expectations for a 0.1% drop. More worrying for policymakers, core inflation – which excludes volatile items like energy and food – rose 0.6% for an annual increase of 6.3%, from 5.9% recorded in July.
The The figures from the Bureau of Labor Statistics ended a brief respite for Fed officials after the July reading showed that prices had not risen from the previous month.
Wall Street was caught off guard by higher than expected inflation figures. The S&P 500 fell 3.1% during Tuesday’s morning session, while the Nasdaq Composite, which includes technology companies more sensitive to changes in interest rate expectations, fell more than 4 %.
In government debt markets, the 2-year US Treasury yield, which is more sensitive to interest rate expectations, jumped 0.20 percentage points to 3.78%, after trading at 3.52% before the release of inflation data.
The likelihood of the Federal Reserve opting for a full percentage point rate hike in September has risen to 22%, according to CME Group, from 0% at the start of the week. Most economists are forecasting another rate hike of 0.75 percentage points, which would take the federal funds rate to a new target range of 3% to 3.25%.
Steven Blitz, chief U.S. economist at TS Lombard, said Tuesday’s data, combined with rising wages and a tight labor market, meant the Fed was “not going to produce the fairy tale of soft landing”. He added, “The Fed has a better chance of throwing a hard eight than engineering a soft landing.”
“We really don’t see anything here that would make the Fed opt for a slower pace of rate hikes this month,” said Brian Coulton, chief economist at Fitch Ratings.
Joe Biden, the US President, and his economic advisers were also hoping for a reduction in the headline figure, going so far as to schedule a “celebration” of his recently passed Cut Inflation Act, a package of health and safety policies. of climate.
Although the event scheduled for later on Tuesday was to trumpet the bill’s passage, the optic was quickly seized upon by Biden’s opponents within the Republican Party.
“You can’t make it up: Hours after that terrible inflation report, the White House is hosting a ‘Cut Inflation’ celebration,” Senate Minority Leader Mitch McConnell wrote on Twitter. . “The Democrats have spent our economy on disaster and now they are celebrating while families pay. They couldn’t look more disconnected if they tried.
The jump in inflation occurred despite falling gasoline prices in recent months. Earlier this summer, they hit a record high of $5 a gallon following a spike in oil prices following Russia’s invasion of Ukraine. The current national average is $3.70, according to the American Automobile Association.
In recent weeks, Fed policymakers have reaffirmed their commitment to controlling inflation and warned of the risks associated with lingering price pressures.
Failure to bring inflation down and let expectations of future price increases soar was likely to mean more economic hardship later, Chairman Jay Powell and Vice Chairman Lael Brainard said last week. .
Policymakers fear the downward trend in gasoline prices may be unsustainable, especially if energy prices rise later this year. Treasury Secretary Janet Yellen warned of that possibility over the weekend, citing concerns about widespread shortages across Europe as the bloc stops buying oil from Russia.