September’s Consumer Price Index Shows Inflation Higher Than Expected After Fed Rate Hikes

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Despite a drop in gas prices and rate hikes, inflation was still higher than expected in September. The Bureau of Labor Statistics (BLS) released its Consumer Price Index (CPI) on Oct. 13 and the all-items index for the 12 months ending September increased 8.2%, driven largely by increases in the shelter, food and medical care indexes.

The figure was higher than anticipated, as Bloomberg expected the CPI, which measures what consumers pay for goods and services including clothes, groceries, restaurant meals, recreational activities and vehicles, to have decreased to 8.1% in September.

This latest figure follows the CPI increasing 8.3% in August from a year earlier, 8.5% in July and 9.1% in June.

“Though the year-over-year rate slightly decreased by 0.1%, the September CPI was disappointing. Core CPI is now at new 40-year highs. Though food and energy prices have begun to retreat, we will likely see the Fed aggressively continue its interest rate hikes,” Rusty Vanneman, Chief Investment Strategist at Orion Advisor Solution, told GOBankingRates.

The sentiment was echoed by several experts who believe this latest figure will further cement the Fed’s hawkish monetary stance.

“The worst fears are playing out as inflation spreads. It started in goods and is now firmly established in services like healthcare and food away from home,” David Russell, VP Market Intelligence at TradeStation Group, told GOBankingRates. “Price increases are spreading like coronavirus in early 2020 with cases popping up across the country. This is the Fed’s worst-case scenario and keeps them on track for more aggressive hikes.”

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The Energy Indexes

In September, the energy index declined 2.1%, with the gasoline index falling 4.9% over the month, while the index for natural gas increased 2.9% and the electricity index also increased 0.4% over the month, the BLS said. Overall, the energy index rose 19.8% over the past 12 months.

“Crude oil hit a low of $76. If it stayed there, the belief was that component prices would follow suit — meaning as oil and gas prices decreased, so would prices elsewhere,” John Catsimatidis, chairman and CEO of Red Apple Group, as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets, told GOBankingRates. “This is a process and it should not be surprising to anyone that prices did not fall instantly as oil and gasoline prices decreased. Many component parts of the economy are still catching up from higher prices in previous months.”

The Food Indexes

In September, the food index increased 0.8%, with the food at home index rising 0.7%, up 13% over the last 12 months. The BLS also reported that all six major grocery store food group indexes increased.

The index for fruits and vegetables rose 1.6%; the index for cereals and bakery products rose 0.9%; the index for meats, poultry, fish, and eggs rose 0.4%; while the index for dairy and related products rose 0.3%. in September.

“As far as food costs are concerned, I anticipate that they will continue to rise ahead of the holiday season and Americans should anticipate paying the most ever for turkeys and Thanksgiving,” Catsimatidis said.

The Medical Care Index

As for the medical care index, it rose 0.8% in September.

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The BLS noted that indexes that declined over the month included the index for used cars and trucks, which fell 1.1%; the apparel index, which fell 0.3% and the communication index, which fell 0.1%.

Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management called the CPI report “a disappointing backslide from recent improving trends.”

“Components such as rent and food continue to remain red-hot and are not likely to recede imminently,” he said. “While investors should understand that Fed policy operates with a lag, especially for certain sectors such as housing — the waiting is the hardest part. The political implications of today’s data are also not to be ignored, as they represent the last CPI data before the November mid-term elections.”

He added that while Shelton Capital continues to believe that housing and other rate-sensitive sectors will eventually show meaningful improvement next year, risk assets are not likely to show as much patience. 

“This should solidify the case for another 75 basis point rate hike at the next FOMC meeting on November 2,” he said.

All Other Indexes

Taking out food and energy indexes, all other indexes increased 0.6% in September, up 6.6% over the past 12 months, the largest 12-month increase in that index since August 1982, the BLS report showed.

Overall, the shelter, food and medical care indexes increased the most for the month. The shelter index increased 0.7% in September, while the rent index rose 0.8%.

Charlie Wise, head of global research and consulting at TransUnion, told GOBankingRates that while there are gradual improvements, which indicates that the Fed’s aggressive interest rate increases are showing some impact at slowing inflation, the level remains well above the target range of 2-3%.

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“So more rate hikes are likely in coming months. Further rate increases are all but certain, which will put further pressure on housing markets and auto affordability. Labor markets remain stable for now but will likely tighten with further rate increases,” he said.

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