Inflation Ticked Up In September. Here’s What That Means for the Fed’s Tapering Plans.

Energy prices rose 1.3% in September and food items 0.9%, the BLS said. Gasoline was up 1.2%.

The yield on the 10-year Treasury note barely moved on the news, down slightly to 1.55% from the previous day.

The data for September came in in-line or slightly ahead of most analysts’ expectations. It is unlikely to have a major influence on the Federal Reserve decision to start phasing out its emergency bond-buying program in November—as widely anticipated by markets and hinted at by Fed Chairman Jerome Powell and other U.S. central bankers.

The first reason is that the CPI reading for September, while ticking up a little, doesn’t reflect a major acceleration in inflation. Instead, it confirms that inflation is proving stickier than anticipated, as energy prices continue to rise while bottlenecks from semiconductor shortages and transportation issues remain.

So-called core inflation—stripped from the effects of food and energy price jumps—was up 0.2% last month. But, as noted by Capital Economics’ Paul Ashworth, this moderate pace “is not as encouraging as it looks” because it includes, among others, a 6.4% decline in airfares and a 1.1% decline in clothing prices.

The second reason the Fed will likely keep its current course is that the central bank uses another indicator to gauge inflation, the personal-consumption expenditures price index, or PCE. Data showed earlier this month that the PCE is now at 4.3% on an annual basis, a three-decade high. That alone would be enough for the Fed to consider that it is now time to “taper,” or start reducing the monthly amount of bonds it purchases on the market, currently at $120 billion.

The most recent data about the state of the U.S. labor market might have been a reason in prepandemic times for the Fed to wait further before giving the signal of monetary policy tightening. With only 194,000 jobs created, instead of the 500,000 expected by analysts, that would seem to reflect a poor job market.

But as noted by ING analysts, the numbers are due in part to a decline in labor participation—that is, people deciding not to return to the labor market and seek a job after the pandemic—and don’t mean that the U.S. economy is weak and still in need of monetary stimulus. On the contrary, the reality is that employers are faced with labor market shortages and may have to raise wages to keep and attract staff.

On top of this, noted UBS chief economist Paul Donovan, the steady, high rate of inflation means that workers are losing out. With the Atlanta Fed wage tracker at below 4%, “at face value that means U.S. real wages are falling quite a lot,” he wrote.

That in turn could directly fuel inflation further. If anything, the labor market numbers have “cleared the Fed’s low bar” for tapering, Oxford Economics analysts have noted, which strengthens their belief that a tapering announcement will be made at the November meeting.

Investor conviction that tapering will happen next month has been firming up recently. Yields on 10-year Treasuries are up by more than 40 basis points, or 0.4 percentage point, since early August.

According to the forecast of the International Monetary Fund published this week, inflation in the U.S. should reach 4.3% this year and fall to 3.5% in 2022 and 2.3% in 2023. By comparison, inflation in the eurozone would stand at 2.2%, 1.7%, and 1.7% in these respective years.

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