Inflation eased slightly last month, but remained too high to be comfortable.
Annual inflation is 7.7%, down from 8.2% in September. The so-called base rate that excludes the volatile food and energy sectors is up 6.3%, just a hair below the previous month’s 6.6%, which was the highest since August 1982. Economists expected, on average, an overall rate of 8% and 6.5%. % basic rate.
The declines are so small that consumers may not feel much relief in everyday life, but in the overall fight against inflation, the declines could signal that at least the worst is over. If data in the coming weeks confirms that 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 soon as december.
But the Fed’s job is far from done. Inflation remains far from the Fed’s 2% target, which means Americans should be prepared for the Fed to continue raising its benchmark short-term federal funds rate through the year. next, according to economists.
Dow futures surge
Stocks reacted positively to the inflation report. Dow Jones Industrial Average futures rose 2.7% shortly after the report was released. Yields on Treasuries fell from expectations that this would lead the Fed to scale back its rate hikes.
What’s more expensive?
Unfortunately, much of what households use every day.
Energy rose 1.8%, reversing some of the declines of the previous four months, and remains a wildcard heading into winter.
“Energy has been a mixed bag, with gasoline prices falling in recent months but electricity and natural gas still rising at a blistering pace,” said Greg McBride, chief financial analyst at Bankrate. “As the weather turns cold, the cost of heating homes will put a greater strain on household budgets.”
Already, 23.1% of households have not been able to pay an energy bill or have not been able to pay the full amount in the last 12 months and 33.9% have reduced or skipped basic expenses, such as medicine or food, to pay their energy bill, according to a LendingTree analysis of US Census Bureau data from July 27 to August 8.
Food, housing and rent prices also rose by 0.6% and 0.7%, respectively, further tightening 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 of Toledo. Rent and utilities are usually around $1,100 per month. There is only $50 to $100 left from each of his paychecks after paying all his bills.
Even with her boyfriend’s income as a mechanical engineer at a solar power plant, which is roughly double what she earns, the two struggle to afford the necessities due to inflation. .
When Scott goes shopping, she fills her basket with frozen food and “the cheapest items I can find,” she says. But often, she skips the grocery store altogether. “Buying food to make a meal has become more expensive than getting a $5 box of Taco Bell that will last me two meals.”
What is cheaper?
Smartphone prices fell 23% from a year ago, the largest price drop of any item included in the CPI. Tickets to sports matches saw the second biggest drop from a year ago, down 18%. Beef prices have also seen notable declines.
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What does this mean for the Fed?
The Fed may only raise rates by half a percentage point next month, ending its four-point 0.75 point hike streak. But remember that just because rate increases will occur at a slower pace, they will go even higher than expected.
Recent data “suggests that the ultimate level of interest rates will be higher than expected,” Federal Reserve Chairman Jerome Powell said last week. This means that the federal funds rate will likely rise above the median peak of 4.6% forecast by the Fed in September. After six rate hikes this year, the fed funds target is now between 3.75% and 4%, up from near zero at the start of the year.
Higher interest rates increase the cost of borrowing, which discourages spending and dampens demand and inflation.
What does this mean for consumers?
Borrowing costs will continue to rise and consumers will likely feel even more stuck.
The annual percentage rate (APR), which includes the interest rate and fees, on a credit card hit a record 19.04% on Wednesday, according to Bankrate.com data dating back to 1985, and is in up from 16.30% at the start. of the year.
This 274 basis point increase so far in 2022 is the largest increase in a single year, Bankrate said, and the year isn’t even over. The second largest increase in a single year was 262 basis points in 2010.
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Additionally, 36% of adults have taken on more debt due to changing interest rates, and 89% who have taken on more debt due to changing interest rates say it has an impact about their longer-term financial plans, a New York Life survey of 4,400 adults last month showed Wednesday.
Worse still, economists generally predict that all those inflation-calming rate hikes will push the economy into a recession, which likely means a lot of job losses.
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“The result will be a deeper recession with the worst losses occurring in the first half of 2023,” said KPMG chief economist Diane Swonk, who expects the jobless rate to hit 6% from 3.7. % in October, before inflation cools sufficiently. .
By the second half of 2023, the US household savings surplus of $2.1 trillion from the pre-pandemic trend could also be completely exhausted, said Dan Silver, US economist at JPMorgan.
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