Summer is over on Wall Street. Those who hoped inflation had peaked this summer were disappointed on Tuesday, September 13, when the August price index was released, causing a steep drop on Wall Street, which had its worst day since June 2020. .
The case is a serious disappointment for Joe Biden, who hoped the topic would not dominate the mid-term elections in early November. “It will take more time and resolution to reduce inflation”, conceded the Democratic president in a press release.
In one year, prices have certainly increased “only” by 8.3% against + 8.5% in July and + 9.5% in June. But this drop is due to the sharp drop in oil prices: the price of a gallon of gasoline has dropped from more than $ 5 in mid-June to $ 3.70 today.
On the other hand, food continues to grow (+ 11.4% over one year) as well as inflation net of energy and food (+ 6.3% over one year, against + 5.9% in July). Housing, the main item in the index, continues its mad rush with an annual increase of 6.2% versus + 5.7 the previous month.
Extremely tight job market
All data (over a year, month by month, with or without energy and food) is worse than expected. Jason Furman, a Harvard economist, was one of the few to predict this in an editorial Wall Street newspaper. On Tuesday he insisted on so-called median inflation, which excludes all assets that have undergone strong upward or downward changes: this leads to the figure “Absolutely scary” 9.2%, according to Mr. Furman, a record since this index was calculated. The conclusion is obvious: inflation is everywhere, and it’s not a drop in oil prices, an easing in airline prices, or an end to the shortage of semiconductors that will solve the problem.
The rise in prices joins the good unemployment figures recorded in August: the United States created 315,000 jobs this month and permanently canceled the job loss of the pandemic. This good news is not good news, as it confirms that the labor market remains extremely tight, which is driving wages down. Even if the increase in remuneration is less than the increase in prices, the inflation wage spiral is clearly starting, with remuneration increasing by 6.7% annually for three months according to the Atlanta Fed.
As a result, the US Federal Reserve (Fed, central bank) will have to take a hard line at its meeting on September 20. Before the release of the index, traders dreamed of a rate hike limited to 0.5%. This probability is now considered almost nil. Some even fear a one point increase in the cost of money (a one in four chance) but the central scenario remains that of a third consecutive 0.75 point increase. This decision would bring the Fed’s short-term rates above 3% (compared to zero until March 2022).
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