Fed’s “Transitional” Inflation Scenario Complicates with Highest Rate in 30 Years

A inflation intensified more broadly in the US economy in October, again challenging prospects for the Federal Reserve of only “transitional” price hikes and offsetting recent wage increases, a blow to consumers, which has led investors to raise bets that the US central bank will raise interest rates sooner than expected.

The yields of Treasuries The two-year interest rates, which track prospects for the Fed’s overnight benchmark, jumped 6 basis points — the highest in three weeks and among the biggest daily gains of the past year and a half — to 0.485% on Wednesday -fair.

The move came after the release of data showing that consumer prices rose 6.2% in October from a year earlier.

This was the biggest annual jump in prices in 30 years and applied to staples like food, energy and rent, as well as cars, whose pace of price increases the Fed expects to ease along with the “bottlenecks” caused by the pandemic in global supply chains.

But these “bottlenecks” continue to be overcome by strong US consumer demand, and core inflation measures, designed to lessen the impact of one-off spikes in goods and services on readings, are also increasing.

“The risks arising from inflation have become increasingly important to Federal Reserve authorities, as excessive accommodation (of monetary policy) for a long time, or, essentially, a heating of the economy, may well have unintended consequences on the that further erode confidence and eventually hamper the recovery,” said Rick Rieder, global director of fixed-income investments at investment giant Blackrock.

With the expectation that demand, supply and salary continue, “short-term inflation readings can be intimidating for ‘inflation fighters’… which could pressure central banks to at least discuss a quicker reaction.”

The Fed still expects inflation to decrease over time, without the need to raise the prices. fees to cool the economy and risk slowing or reversing employment growth in the process.

But the more inflation data exceed expectations, the harder it will be to maintain that position.

“With annual inflation now at over 6%, is that enough to force the Fed’s hand? This long, long transitional period has to increase the pressure on the Fed,” said Seema Shah, chief strategist at Principal Global Investors.