Judging by the latest Consumer Price Index (CPI) data this week, inflation isn’t going away anytime soon…

On Wednesday, the data showed inflation growing at an annual rate of 5.4%. That matches the inflation numbers from June and July, representing a 13-year high.

It’s also the fifth month in a row that inflation has come in at 5% or higher.

Suddenly, you can sense that some of the language about inflation is changing. Instead of “transitory,” some economists are now starting to describe inflation as “sticky.”

In other words, they’re expecting inflation to remain “higher for longer.” That’s not good for consumers or the economy.

Where the real inflation hits

When I read through this month’s inflation data, something really stood out…

According to the Bureau of Labor Statistics, the rising prices of food and shelter accounted for over half of the total rise in inflation.

To be fair, some of that increase in rent might turn out to be transitory. After moving out of major cities due to COVID, some folks are now returning. And that’s putting some pressure on rental demand.

However, the rise in food costs look as though they still have a ways to go…

Food rose 0.9% in September, more than double the 0.4% rise in August. That’s a 4.6% increase for the year – the highest level since December 2011.

While beef was responsible for a big part of that increase (rising 4.8% for the month), there are other external factors in play…

The cost of fertilizer – a key component of the global food chain – has spiked and is trading at 10-year highs.

Add in rising energy costs, and it’s hard to see how inflation will cool off any time soon.

Apart from the direct cost on those trying to get by, it has knock-on effects through out the economy.

It means that after paying for basic needs, consumers have two choices…

They either reduce the amount they spend on discretionary (non-essential goods), or they simply don’t spend money on non-essential purchases at all.

Either scenario will cause harm to the economy.

That’s why I closely watch discretionary spending. It tells me how much people have (and are willing) to spend on goods and services beyond their essential needs.

It’s also why when it comes to inflation, it’s the Fed that holds the keys…

Now, back to the Fed

When it comes to the Fed’s monthly $120-billion asset purchases (bond buying), the markets have already factored in one thing…

This program will come to an end. The debate comes down to timing. Notes from the Fed’s most recent meeting suggests that tapering could begin as soon as next month.

But, the real change from previous meetings is their approach to inflation. It’s clear that the Fed is becoming more worried about inflation.

Last week, I wrote about the important correlation between inflation and interest rates. It now seems that with inflation on the rise, a growing number of Fed members are expecting to see a rate rise later next year.

They’ve been worried about a lack of inflation through most of last year, and now they’re worried that inflation could get out of hand.

The futures market is also starting to price future interest rate rises next year as well. The next question then becomes: “How many rises and when?”

For now, the Fed is hesistant to confirm any rate rises just yet. However, rising inflation could force their hand much sooner than they expect.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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