CPI Makes it Clear the Fed Is Failing its Dual Mandate
A warm CPI print raises questions about rising inflation and pressure on unemployment.
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On Thursday morning, the Bureau of Labor Statistics released its September data for consumer prices. The Consumer Price Index (CPI) has more market impact than the Fed's preferred measure for consumer pricing, the PCE Price Index, and this would be the final CPI print prior to the national election on November 5.
Readers know well that I had been looking toward this September report as the likely cycle low before a gradual reacceleration in consumer prices that I think will start with the current month makes life more difficult for policy makers (and, of course, consumers themselves).
There was good news. For the month of September, headline CPI growth fell to 2.4% year over year from 2.5% for August. While that was the sixth-consecutive month of deceleration (disinflation, as opposed to deflation) for that line, it was also above the 2.3% growth that economists were looking for.
Quite disturbing, I think, was the increase in core CPI that actually increased to growth of 3.3% year over year from the August print of 3.2%. That was the first increase for this data point since March 2023. Wall Street was looking for another 3.2% print, so this one, despite being disappointing, was also hot to the touch.
On a month-over-month basis, headline CPI printed at growth of 0.2% for a third-consecutive month, while core CPI hit the tape at growth of 0.3% for a second straight month. Wall Street had been looking for month-over-month growth of 0.1% and 0.2%, respectively, so there was not the further deceleration in September prices from August that had been hoped for.
Market Response
Unfortunately, the weekly print for Initial Jobless Claims popped from 225,000 a week ago up to 258,000, marking the week of October 5, 2024, as the worst single week for U.S. labor markets since the week of August 5, 2023. This happened as the weekly continuing jobless claims number, which had been in steady decline, made a six-week high.
Is all this the impact of Hurricane Helene? Could be. The increase in initial claims came to 33,000, nationally. A total of 16,041 of those came from North Carolina, Florida, Tennessee, South Carolina and Georgia. That's about half of the increase, so there was still a noticeable enough jump in claims for unemployment benefits, even without Helene. Don't forget, Hurricane Milton will also likely damage labor markets, at least in Florida.
This puts the Fed in the tough spot that we have been talking about for months now. Many Fed officials have talked about the needs of the central bank's dual mandate having come into better balance, as if that's a good thing. Economic growth had been accelerating, which had put a bid under demand for labor, as consumer level inflation had run too hot. Easy decision for a Fed that focused on fighting inflation and let the economy itself run close to full employment. By that I mean a nearly fully employed labor supply and not an economy running at or close to potential.
Most Fed officials have felt a need of late to focus on supporting labor markets before that market faced serious deterioration, as inflation, partly due to policy and partly due to base effects, had decelerated. What does Jerome Powell and his merry band of semi-useful idiots do if inflation accelerates from here (requiring higher interest rates), while labor markets start needing attention in earnest?
This is almost a master class in why one, if charged with monetary policy for the largest economy on earth, should never, ever initiate a change in policy with a larger-than-necessary change in the trajectory for short-term interest rates. Especially if, when asked why, they are only capable of shrugging their shoulders and saying something semi-nonsensical about recalibration.
The Fed had better hope that this past Friday's extraordinarily-hot September jobs report that brought with it upside revisions to July and August can hold most of those robust gains as that NFP print faces what one would have to guess could be downside revisions over the coming months.
What's Hot? What's Not?
The list is a little scary. September food prices, prices for electricity and other utilities, apparel, transportation services and medical care services all put upside pressure on the month-over-month headline CPI results.
Shelter finally cooled a bit, but remained in line with results. The only real space where there was downward pressure on consumer prices in September was in the energy space. Gasoline was down 4.1% month over month, while fuel oil was down 6% month over month. We already know that energy prices will likely be significantly higher in October than they were in September.
After This Report...
The Cleveland Fed, which runs real-time nowcast models for both CPI and PCE, is now showing October Headline CPI at 2.55% and October Core CPI at 3.34%. Not on fire, but indeed higher.
I have told you that this re-acceleration will likely start gradually. By the second quarter of 2025, if all inputs remain on their current trajectories, which may be a foolish assumption, headline CPI will be above 3%, perhaps well above 3% by Q2 2025.
The FOMC will then have to decide whether to rob Peter to pay Paul or to rob Paul to pay Peter. There will have to either be an acceptance of higher unemployment for the sake of pressuring inflation, or an acceptance of higher inflation for the sake of pressuring unemployment.
How does the election play into this? Under the leadership of either of the two leading parties' nominees, I do not see any attempt made to curb deficit spending, as that would cause short-term pain. They will both, in their own ways, press for lower interest rates and that will harm economic performance.
Yes, it is possible to buy economic growth and not get what you pay for. Good luck out there.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
