- September saw an unexpectedly high level of inflation, which raises new questions about the future of the economy.
- The Fed’s anti inflation efforts have not worked and are fueling speculation about rising interest rates.
- The White House could be affected by midterms, while the Fed could tighten stocks.
Some economic data releases are extremely complex, leaving both experts and everyday Americans less clear about the country’s economy health.
The September inflation report showed trouble ahead. Nearly all of the details in the report paint a dire picture for the country’s near future. This makes a self-induced recession more likely.
The Consumer Price Index In September, the rate of increase was 0.4%Both showed an 8.2% year-overyear pace, exceeding economists’ expectations. Core inflation, which excludes volatile foods-and-energy prices and jumped 0.6% last months, with a 6.6% year-over-year increase. This was the fastest growth in core prices since 1982.
Details of the report were equally dire. As Shelter inflation took over gas and food prices, The largest driver of inflation in headlinesThe rate of change in the economy has also accelerated to its fastest annual pace since 1982. The month also saw an increase in inflation for medical care, transportation services like mass transit and airlines.
For the Federal Reserve, the new data makes its battle against inflation — which has included multiple historically large rate hikes — look futile. The stock market is facing a significant headwind from the possibility of Fed tightening, with indexes at 2022 lows. The White House must now deal with negative inflation headlines just weeks before the crucial midterm elections.
Investors face a market reckoning
The stock market’s path to 2022 has been straightforward. If the Fed slows its hiking cycle, investors cheer. Stocks rally. Signs that the central bank will not slow down its hiking cycle often lead to sudden declines in stock prices and fears of an economic recession.
This precedent was met in the first hour of Thursday’s trading session. The S&P 500 Drops of up to 2.4% have been reportedMarkets opened shortly after, and investors saw the report as a clear indication that the Fed will continue to hike its plans. But those losses reversed by midday, and stocks rebounded into afternoon.
Options traders now price in 0.75-point rate increases for both November and December Fed meetings. These moves would severely limit economic growth.
Stock investors will face a steep climb for the remainder of 2019 and 2023. Higher rates mean that borrowing costs are higher for companies. This can lead to slower profit growth for firms. Additionally, traders will place a greater bar for companies to meet when they begin announcing quarterly earnings.
“These inflation numbers are a major pain point in the markets.” To offset the headwinds from an aggressive Fed, earnings season next year would need to be doubled in strength, Yung-Yu Ma (chief investment strategist at BMO Wealth Management) stated. Although earnings season may not be disastrous, it will be difficult to turn the tide.
Trading will become more volatile with several rate increases on the horizon.
The door is wide open for strong inflationFed to continue its rapid hike pace
While the September CPI reading may have made investing more difficult than usual, it makes Fed’s decision making process much simpler.
In September, central-bank officials projected that the Fed would increase rates. An additional three-quarters point is requiredIn November, the Fed eased to a half-point increase at its December meeting. That projection was echoed in the market positioning as it entered Thursday morning.
Inflation data has changed the outlook in just minutes. The markets are anticipating back-to-back 0.75 point increases through the year, as well as continued hikes into early 2023.
Principal Asset Management’s chief global strategist, Seema Shah, stated that “after today’s inflation report there can’t possibly be anyone left in market who believes that the Fed can raise rates any less than 75bps at November’s meeting.” “Slowing growth yet rising inflation — the combination none of us, and least of all the Fed, want to see.”
Fed officials constantly hinting that they are still working on tightening, significant increases in interest rates will be a fact for at least the next one-year.
Democrats’ already fragile election prospects are at risk from worse-than-expected inflation
The Thursday report was Democrats’ last chance to secure a surprise inflation cooling down that they could continue their campaign through Election Day.
The worst-case scenario was what they got. Republicans Already preferred to take control of the HouseNow, we have a new point of conversation that is relevant to all Americans. As campaigns enter their final sprints and the surge in inflation continues, Democrats may lose their hopes of keeping the Senate.
The result will likely see the Biden administration go down in flames for the next two years, just before the 2024 elections. President Joe Biden was able to pass much of his legislative agenda due to the fragile control of Congress Democrats. However, many of his packages were reduced. Yet much of the blowback — from Republicans and moderate Democrats alike — centered around the policies putting more cash into the economy when inflation was on the rise.
Core inflation is higher than ever during the pandemic. Republicans will push for spending cuts and deficit reduction if they win the House. There are very few chances of bipartisan policymaking. Until inflation shows signs of easing, the GOP is likely to seek to reverse many of its recent victories.
