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The Line: Inflation Higher Than Expected Last Month

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

The Consumer Price Index rose 0.4% last month, a bit faster than the 0.3% Dow Jones estimate. Prices are now 8.2% higher than a year ago, which is down from a recent peak of 9.0% in June, but certainly nothing to celebrate.

The scariest number in the CPI report was 6.6%. This was the increase over the past year in the core CPI index, which excludes food and energy prices. This was much higher than expected, and the biggest annual growth in core CPI since August 1982. Another disappointing finding of the report is that wages have fallen 3% over the past year after adjusting for inflation.

For those who want all the depressing news, you can view the complete report here.

Not to be outdone, producer prices also rose more than expected last month. The Producer Price Index was up 0.4% in September and is running 8.5% higher than a year ago.

So, despite five aggressive rate hikes since March, the Federal Reserve is still a long way from getting inflation under control. This inflation report—combined with September’s strong jobs report—now has markets expecting 0.75% rate hikes at both Fed meetings in November and December. That would make it five 0.75% hikes in a row.

Why haven’t the Fed’s rate hikes brought inflation down more, especially since they started seven months ago? Great question. As I’ve said before, any change in monetary policy can take between six months to a year to show real results. Since this inflation has been fueled by an unprecedented increase in the money supply combined with severe disruptions to supply chains, your typical remedy—rate hikes—may take much longer to work.

After skyrocketing over 40% during the pandemic, the money supply has come down a little in 2022. That said, we need to see more of a reduction in the money supply to make any real progress on inflation. As I’ve said a million times, inflation is too much money chasing too few goods. There is some good news on the supply front. According to the Federal Reserve Bank of New York, their Global Supply Chain Pressure index fell for the fifth straight month in September. They state in the report that "global supply chain pressures are beginning to fall back in line with historical levels." That is great news. If only we can get the money supply more in line with historical levels, we could finally get inflation under control, and I can write more happy columns.

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