A retreat of the U.S. dollar from a 32-year high against the yen saved stocks and cryptocurrencies from another inflation-induced selloff in a sharp intraday reversal.
Inflation is turning from a food and energy problem to a core problem, spreading into several goods and services consumers regularly purchase, like medical services, insurance, and shelter.
The all-items U.S. inflation for September rose at an annual rate of 8.2%, slightly below the August number but ahead of market expectations.
The core inflation, which excludes the volatile components of food and energy, rose by 6.6% in September, up from 6.3% in August and well ahead of market expectations.
Price hikes were widespread, led by vehicle insurance (+1.6%), shelter (+0.8%), and medical services (+0.8%).
“What savings consumers might have seen in gasoline and home energy costs from July through September are offset by rising overall housing costs,” Kurt Rankin, a senior economist at PNC Financial Services Group, told International Business Times in an email.
The September consumer inflation numbers are consistent with producer inflation released yesterday. It, too, showed that inflation remains “unacceptably” elevated, as the FOMC members expected in the September minutes meeting.
Wall Street didn’t like what it saw in the numbers. In the debt market, bonds sold off in early morning trade, with the benchmark 10-year Treasury bond yield crossing 4%.
In the currency markets, the U.S. Dollar Index spiked toward the 114 mark.
Equities fared even worse, with all major equity indexes opening close to 2% lower.
Bitcoin suffered even more significant losses, dropping close to the $18,300 mark.
But things turned around by late Thursday morning due to a retreat in the U.S. Dollar Index towards the 112-mark. It prompted a rally in the large-cap high-tech stocks that derive substantial revenues and earnings from overseas markets, which led all major indexes close to 3% higher.
Bitcoin raced back above $19,000.
Still, the rally in stocks and cryptocurrencies may be short-lived as interest rates are heading higher from here.
“The Federal Reserve’s monetary policy tightening plans remain aggressive,” said Rankin. “Their data dependency message will require Core CPI inflation, especially, to ease before any course correction becomes a consideration.”
And that would require significant interest rate hikes to cool off the labor market and take wage growth lower.
“Unfortunately, wage growth in the U.S. economy has already begun to fizzle while inflation has remained stubbornly high,” said Rankin. “The Fed’s “Demand Destruction” aims will only weaken workers’ bargaining positions in the labor market as consumer demand is undercut and businesses see less need to hire in response to slowing demand for their goods and services.”
But that would depend on new inflation data.
“The Fed will take an even more hawkish approach and tighten, especially if the October 28 PCE inflation number comes in as hot as the recent CPI numbers before their next meeting on November 2,” said former White House Economist Tomas Philipson.