Summer is over on Wall Street. Those who hoped that inflation had peaked this summer were disillusioned on Tuesday, September 13, when the August price index was released, causing a sharp fall on Wall Street, which had its worst day ever. since June 2020.
The case is a serious disappointment for Joe Biden, who hoped that the subject would not dominate the midterm elections in early November. “It will take more time and resolution to bring inflation down,” conceded the Democratic president in a press release.
Over one year, prices have certainly increased “only” by 8.3% against + 8.5% in July and + 9.5% in June. But this decline is due to the sharp decline in oil prices – the price of a gallon of gasoline has fallen from more than 5 dollars in mid-June to 3.70 dollars currently.
On the other hand, food continues to soar (+11.4% over one year) as does inflation excluding energy and food (+6.3% over one year, against +5.9% in July). Housing, the leading item in the index, continues its mad dash with an annual increase of 6.2% against + 5.7 the previous month.
Extremely tight labor market
All the figures (over a year, month by month, with or without energy and food) are worse than expected. Jason Furman, a Harvard economist, was one of the few to predict this in an op-ed at wall street journal. On Tuesday, he insisted on the so-called median inflation, which excludes all goods that have experienced strong upward or downward variations: this reaches the figure “absolutely appalling” 9.2%, according to Mr. Furman, a record since this index was calculated. The conclusion is obvious: inflation is everywhere, and it is not a drop in oil prices, an easing of airline prices or the end of the shortage of semiconductors that will solve the problem.
The rise in prices is combined with the good unemployment figures recorded in August: the United States created 315,000 jobs this month and they have definitively erased the job losses of the pandemic. This good news is not good news, as it confirms that the labor market remains extremely tight, which is pushing wages down. Even if the increase in remuneration is lower than the rise in prices, the inflation-wage spiral is clearly setting in, with remuneration rising 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 adopt a hard line at its meeting on September 20. Prior to 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 rise in the cost of money by one point (one chance in four) but the central scenario remains that of a third consecutive increase of 0.75 points. This decision would take the short-term rates charged by the Fed above 3% (compared to zero until March 2022).
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