A key inflation reading on Friday showed the prices consumers are paying for goods and services rose more quickly in September than one month prior—effectively bolstering the Federal Reserve’s case for another mega-sized interest rate hike in November but keeping the door open for officials to downsize the hikes thereafter.
The personal consumption expenditures index, which tracks a broader basket of goods and services than the closely followed consumer price index, jumped 6.2% in September on an annual basis—remaining flat from August, while the core index, which excludes volatile food and energy prices, ticked up to 5.1% from 4.9%, according to the Commerce Department.
The figure, which Fed officials use to gauge overall inflation and inform policy decisions, came in slightly below expectations on a yearly basis but were in line on a monthly basis, with prices for food, housing and transportation fueling the overall increase despite a decrease in gas prices.
The numbers “confirm the Fed has more work to do to cool demand and reduce inflation,” says EY senior economist Lydia Boussour, noting the release shows headwinds are gathering for the consumer, with personal savings rate (as a percentage of disposable income) falling to 3.1% in September—the lowest level since 2008.
In a morning note, Vital Knowledge founder Adam Crisafulli agreed, saying the data will help keep the Fed on track for its fourth consecutive 75-basis-point hike in November, a downsized half-point hike in December, then smaller hikes and an eventual pause next year.
That’s not the best news for stocks—particularly since borrowing costs are set to rise to the highest level in 15 years next month, notes Crisafulli, who says there needs to be a “sharp turn lower in both inflation and employment” in order to help investors feel comfortable that the Fed has cooled the economy enough to pivot its policy.
Until then, Crisafulli expects the S&P 500, which has collapsed 21% this year, will remain below 3,900 points—still 19% below an all-time high above 4,800 set in early January.
What To Watch For
Fed officials are slated to announce how big the next interest rate hike will be at the conclusion of their upcoming two-day policy meeting on Wednesday. Comerica Bank forecasts the Fed will authorize another 75-basis-point hike in November, followed by a half-point in December and a quarter-point in February—putting the Fed funds target at a “very restrictive” range of 4.5% to 4.75%.
With prolonged inflation forcing central banks to hike interest rates aggressively this year, pockets of the economy have started to suffer immensely—particularly the housing and stock markets. A growing number of economists are worried additional rate hikes could further tank the economy, but Fed officials have remained steadfast in their commitment to lower inflation—even if it means risking a recession. Earlier this month, the Fed said additional hikes would help prevent the “far greater economic pain” associated with high inflation and added that the cost of taking too little action “likely” outweighs the cost of taking too much.
“With household confidence historically depressed and savings cushions rapidly dwindling, consumers will grow increasingly reluctant to spend, especially as labor market conditions deteriorate and household wealth takes a hit from falling stock prices and declining home values,” says Boussour.