Key Inflation Gauge Rises Unexpectedly, Dimming Hopes for Big Rate Cut from Fed

Unexpected Inflation Jump Raises Concerns

The Federal Reserve's hopes for a significant interest rate cut have been dampened after a key inflation gauge unexpectedly rose in October 2022. The Personal Consumption Expenditures (PCE) index, the Fed's preferred measure of inflation, increased by 0.5% last month, double the expected 0.25% increase. This unexpected jump has raised concerns that inflation may be more persistent than previously thought, making it less likely that the Fed will implement a substantial rate cut in the near future.

Core Inflation Remains Elevated

Underlying inflation, as measured by the PCE core index, which excludes volatile food and energy prices, also rose unexpectedly in October. The core PCE index increased by 0.3%, above the expected 0.2% increase. This increase suggests that inflation is becoming more broad-based and may be less likely to moderate quickly.

Fed's Reaction

The Fed's policy-making committee, the Federal Open Market Committee (FOMC), is scheduled to meet on November 1-2 and is widely expected to raise interest rates by 75 basis points for the fourth consecutive time. However, the latest inflation data may prompt the Fed to consider a smaller rate increase or even pause its rate-hike cycle.

Economic Implications

The unexpected rise in inflation has significant implications for the US economy. Higher inflation erodes the purchasing power of consumers and businesses, making it more expensive to buy goods and services. It can also lead to higher borrowing costs, making it more difficult for businesses to invest and grow. Additionally, persistent inflation can damage the Fed's credibility and make it more difficult to control inflation in the future.

Market Reaction

Financial markets reacted negatively to the inflation data, with stock prices falling and bond yields rising. Investors now expect the Fed to maintain a more hawkish stance on interest rates, which could slow economic growth and reduce corporate profits.

Conclusion

The unexpected rise in inflation in October has raised concerns about the persistence of inflation and the Fed's ability to bring it down to its target of 2%. The Fed is likely to remain cautious in its rate-hike decisions, balancing the need to control inflation with the risk of slowing economic growth.