The latest signs of persistent inflation suggest the Federal Reserve will keep the door open to another interest-rate hike this year, even as central bankers emphasize patience ahead of their next meeting.
(Bloomberg) — The latest signs of persistent inflation suggest the Federal Reserve will keep the door open to another interest-rate hike this year, even as central bankers emphasize patience ahead of their next meeting.
The so-called core consumer price index, which excludes food and energy costs, increased 0.3% last month, Bureau of Labor Statistics data showed Thursday. Economists favor the core gauge as a better indicator of underlying inflation. The overall CPI climbed 0.4%, higher than expected, boosted by energy costs.
Read more: US Consumer Prices Rise at Brisk Pace for Second Straight Month
Both increases are consistent with an annual pace well above the Fed’s 2% goal.
“This will keep the Fed open to another rate hike, though admittedly the market might end up doing the tightening for them,” said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co.
Bostjancic was referring to a recent surge in long-term Treasury yields. That’s prompted some policymakers to suggest they may hold off on another hike when they meet on Oct. 31-Nov. 1, as they parse the reasons behind the run-up.
Treasury yields rose following the latest price report, as traders saw roughly 50-50 chances of a hike by year’s end.
Fed policymakers agreed last month that policy should remain restrictive for some time, while noting that the risks of overtightening now had to be balanced against keeping inflation on a downward path toward 2%, according to minutes of the September meeting released Wednesday.
The CPI report showed a step-up in prices for services, which has been a particular concern of Fed officials led by Chair Jerome Powell, because they see the sector’s inflation as driven in part by a tight labor market.
Excluding housing and energy, services prices climbed 0.6% from August, the most in a year, according to Bloomberg calculations.
“It boils down to services,” said Jay Bryson, Wells Fargo & Co. chief economist. “The last mile to get us back down to 2% on a sustained basis, that is tough. That is why the Fed will remain restrictive for quite some time to make sure that does come down.”
Fed officials are trying to decide whether they need to hike their benchmark lending rate again after raising it by more than five percentage points over the last 19 months.
They left the rate unchanged at their last policy meeting in September, though 12 out of 19 officials signaled they would support another rate increase this year, according to projections released at the meeting.
Yet central bankers’ emphasis on patience means it will take additional data to persuade the majority of the need for another hike.
“They’re pretty set on proceeding carefully and letting patience guide their thinking, so I wouldn’t count on a fourth-quarter hike unless the urgency ramps up with more data,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics.
–With assistance from Marien Lopez-Medina and Vince Golle.
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