For months, the Federal Reserve has taken a cautious approach to higher-than-expected inflation, repeatedly stating that a months-long increase in consumer prices is temporary and that raising interest rates too soon risks jeopardising the United States’ ability to achieve full employment recovery.However, after the government reported on Wednesday morning that consumer prices in the United States rose 6.2 percent in October compared to the same month a year ago, analysts are questioning that attitude.
Over the past year, core prices, which remove the more volatile measures of energy and food, increased by 4.6 percent. Both of these increases are the most significant in the last 30 years. With new indications that the labour market is recovering from a summer slowdown – the unemployment rate fell to a new historic low of 4.8 percent in October as the economy added 531,000 jobs – the Federal Reserve may be forced to hike interest rates as early as next summer. According to the CME’s FedWatch tool, traders are now pricing in at least two rate hikes in 2022, with a 46 percent possibility of a third hike. Others, on the other hand, doubt that the October inflation rate will be enough to persuade the US central bank to alter course.
However, the Fed did not address whether persistently increasing inflation has prompted them to reconsider their ultra-low interest rates. Chairman Jerome Powell has consistently stated that inflation is “transitory,” blaming the rise in prices on disrupted supply chains, pent-up consumer demand, and stimulus funding. However, in recent weeks, he has softened his tone, recognising that rising inflation may not abate until the second half of 2022. Supply bottlenecks and shortages, as well as excessive inflation, are expected to last far into next year, according to our baseline forecast. However, central bank officials are leery of withdrawing economic support too soon and jeopardising the United States‘ recovery from the pandemic by hiking interest rates to combat inflation.