The September Consumer Price Index report just confirmed what most Americans already knew: shopping is getting more expensive.
After two months of stabilization, inflation jumped 3.4% last month. Core CPI, which excludes natural gas and energy prices that have soared since the outbreak of the war with Iran, also rose 2.6% from a year earlier, up from 2.4% in August. Economists expect interest rates to be 2.5%. Meanwhile, the Bureau of Labor Statistics said gasoline prices rose 9.1%, accounting for more than half of the monthly increase.
Also read: September CPI data is hot, the Federal Reserve may raise interest rates, causing anxiety among midterm voters
Now, Wall Street is bracing for another shoe from the Federal Reserve, which will have one tool to curb stubborn inflation: raising interest rates.
“September’s consumer price index (CPI) data was a pour of cold water on dovish hopes,” Daniela Hathorn, senior market analyst at Capital.com, told TheStreet. “In fact, the breakdown of the data shows that core services are still a larger contributor than energy, which is especially troubling for a central bank focused on returning inflation to 2%.”
Hathorne said that fact “almost confirms that the Fed will raise rates again, possibly even at its meeting in two weeks.”
But analysts at Truflation said raising rates would be a mistake.
It would be a mistake for the Fed to raise rates now
Truflation is a provider of real-time inflation data, tracking more than 15 million real-time price points daily from more than 40 commercial and public data sources.
For them, the biggest concern about inflation right now is not that the overall inflation numbers are accelerating; Rather, the gap between core data and aggregate data is widening.
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“This reinforces the view that energy is taking the lead and putting pressure on headline inflation. If this continues, it will undoubtedly put pressure on the core in due course,” Truflation said in its September CPI inflation report shared with TheStreet.
However, despite these concerns, the firm believes that raising interest rates is the wrong lever for the Fed.
“If you look at it purely from an inflation perspective, there is no reason for the Fed to raise interest rates. It does not address the fundamental supply-side pressures currently driving inflation,” the report noted. “Further rate increases will not address the current supply-driven inflation problem, nor will it directly address energy or import supply shocks. “
Instead, the Fed should wait for the Iran war to subside (however long that may take) so that the economy can naturally see inflation ease without intervention.
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Raising interest rates comes with risks, especially for the tech sector
Hathorn noted that the market’s initial reaction to the stronger-than-expected CPI report was expected, as yields and the dollar rose while stocks and gold fell.
This dynamic creates a problem for the Federal Reserve.
Related: Inflation likely to worsen in September, according to Goldman Sachs
With long-term yields already at multi-decade highs, the question is whether there will be appetite to raise rates further, or whether such high yields will attract new buyers. So far, it appears to be the latter,” Hathorne said.
Meanwhile, for stocks, headwinds haven’t changed. Concerns about disappointing AI return guidance are top of mind for markets, which could become nervous if borrowing costs become more expensive due to rising interest rates and inflation continues to threaten profitability.
So there’s a lot that tech companies need to do in the coming weeks if they want to continue to hold on to the wider market. Hathorne said that as it stands, a disappointing earnings season for big tech companies and very large companies could be very costly for global stock markets because the breadth of the stock market has become extremely narrow.
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