Inflation eased ever so slightly last month but remained too high for comfort.
Annual inflation is 7.7%, down from September’s 8.2%. The so-called core rate that excludes the volatile food and energy sectors is up 6.3%, just a hair below the prior month’s 6.6%, which was the highest since August 1982. Economists expected, on average, an 8% headline rate and 6.5% core rate.
The declines are so small that consumers may not feel much relief in day-to-day life, but in the overall inflation fight, the declines might signal that at least the worst is over. If data in the weeks ahead confirm prices are stabilizing and the economy – particularly the resilient labor market – is cooling, the Federal Reserve’s plan to slow the pace of rate hikes could come as early as December.
But the Fed’s job is far from over. Inflation remains far from the Fed’s 2% goal, which means Americans should prepare for the Fed to keep raising its short-term benchmark fed funds rate into next year, economists say.
Stock market soars
Stocks mounted their biggest rally since 2020 off the better-than-expected inflation data. The Dow Jones Industrial Average jumped 1,201.43 points, or 3.7%. The S&P 500 jumped 5.54%, and the Nasdaq Composite surged 7.35%.
What’s more expensive?
Unfortunately, much of what households use every day.
Energy rose 1.8%, reversing some of the declines of the prior four months, and remains a wild card heading into winter.
“Energy has been a mixed bag, with gasoline prices having declined in recent months but electricity and natural gas still rising at a whopping pace,” said Greg McBride, Bankrate chief financial analyst. “As weather turns cold, the cost of heating homes will further strain household budgets.”
Already, 23.1% of households were unable to pay an energy bill or unable to pay the full amount in the past 12 months and 33.9% reduced or skipped basic expenses, such as medicine or food, to be able to afford their energy bill, according to a LendingTree analysis of U.S. Census Bureau data from July 27 to Aug. 8.
Food and shelter and rent prices also rose 0.6% and 0.7%, respectively, further squeezing household budgets.
Briana Scott, 22, a senior at the University of Toledo, took the semester off so she could earn money to cover her increased cost of living. Scott now works at a convenience store where she earns $10 an hour working 30 to 35 hours a week.
She lives in a 550-square-foot apartment with her boyfriend and their two cats in Perrysburg, Ohio, just outside Toledo. Rent and utilities usually shake out to about $1,100 a month. Only $50 to $100 from each of her paychecks is left after she pays all her bills.
Even with her boyfriend’s income as a mechanical engineer at a solar power plant, which is roughly double what she makes, the two are struggling to afford necessities as a result of inflation.
When Scott goes food shopping, she fills her cart with frozen foods and “the cheapest items I can find,” she said. But frequently she skips the grocery store altogether. “Buying food to prepare a meal has become more expensive than getting a $5 box from Taco Bell that’ll last me two meals.”
What’s less expensive?
Smartphone prices are down 23% compared with last year, the biggest price decline of any item included in the CPI. Tickets to sporting games saw the second biggest decline from last year, down 18%. Beef prices also saw notable declines.
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What does this mean for the Fed?
The Fed may raise rates by only a half percentage point next month, ending its 0.75-point increase streak at four. But remember, just because rate increases come at a slower pace, they are going to go even higher than had been expected.
Recent data “suggest that the ultimate level of interest rates will be higher than previously expected,” Federal Reserve Chairman Jerome Powell said last week. That means the fed funds rate will likely head higher than the Fed’s median 4.6% peak forecast in September. After six rate increases this year, the fed funds target is now between 3.75% to 4% from near zero at the start of the year.
Higher interest rates raises the cost of borrowing, which discourages spending and cools demand and inflation.
What does this mean for consumers?
Borrowing costs will continue to surge, and consumers will likely feel even more pinched.
The average annual percentage rate (APR), which includes the interest rate and fees, on a credit card climbed to a record 19.04% on Wednesday, according to Bankrate.com data going back to 1985, and is up from 16.30% at the beginning of the year.
That increase of 274 basis points so far in 2022 is the largest increase within a single year, Bankrate said, and the year isn’t even finished. The next largest increase within a single year was 262 basis points in 2010.
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Also, 36% of adults have taken on more debt because of changing interest rates, and 89% who took on more debt due to changing interest rates say this is having an impact on their longer-term financial plans, a New York Life survey of 4,400 adults last month showed on Wednesday.
Even worse, economists generally predict all these rate hikes to cool inflation will plunge the economy into a recession, which likely means lots of job losses.
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“The result will be a deeper recession with the worst of the losses occurring during the first half of 2023,” said Diane Swonk, KPMG chief economist, who expects the unemployment rate to touch 6% from 3.7% in October, before inflation sufficiently cools.
By the second half of 2023, U.S. household excess savings of $2.1 trillion relative to the pre-pandemic trend also could be completely depleted, said Dan Silver, JPMorgan U.S. economist.
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