October's surge in consumer prices was driven by some factors that may linger. Market pros say the Federal Reserve may be forced to move up the timeline on its ultimate inflation-fighting tool: interest rate hikes.
The consumer price index jumped 0.9% on a monthly basis, and was up 6.2% year-over-year, the fastest pace in 30 years. According to Dow Jones, economists had expected a 5.9% gain. Excluding food and energy, the increase was still high, up 0.6% or 4.6% year-over-year.
CPI measures inflation based on a basket of products from rents and groceries to gasoline and medical services. After the October report Wednesday, Treasury yields rose and markets began to price in more aggressive Fed tightening, or interest rate hikes.
The fed funds futures market showed that traders have placed higher odds on the central bank to start raising rates by July, rather than September. Traders expect another hike by next December and at least three more in 2023.
"The real risk is they're going to move faster than September... and the market is pricing in a faster move. And until today, we actually thought the market was ahead of itself," said Michael Englund, chief economist at Action Economics.
"If you get a few more numbers like this, not only is inflation not slowing, it's accelerating," he added. "If it continues to gain steam, there may be more of a panic in the first quarter, given what happens in December, January and February. We already know we're going to have big price gains in November, given what we've seen in gas prices."
But Englund said the Fed is likely to be more dovish next year. Fed Chairman Jerome Powell's term expires early next year. Even if he is not renominated, his possible replacement, Fed Governor Lael Brainard, is viewed as a dove.
"We continue to think they'll try to hold the line as long as they can," said Englund.
Economists said the inflation has become broader, and therefore risks are becoming more persistent.
Diane Swonk, chief economist at Grant Thornton, said she does not expect inflation to peak until early next year.
"I still think we'll be cresting out in the first quarter. It's going to get worse before it gets better. The comps don't play out until the spring," she said. "It's not a pretty picture right now."
Some factors, like semiconductor shortages, could fade. But that one in particular is clearly showing up in car prices, as the lack of chips has made it impossible for car makers to keep up with demand.
Used vehicle prices again were a big contributor to CPI, up 2.5% over September, and 26.4% year over year. New vehicle prices rose 1.4% on a monthly basis and 9.8% over the last 12 months.
Swonk says higher inflation could push the Fed to speed up the tapering of its $120 billion a month bond-buying program. That would clear the central bank to move faster to raise rates next year.
Boiling oil
Gasoline is one of those areas that could be hotter-than-expected and for longer periods. Consumers are feeling the pinch of higher fuel costs all across the country. Nationally, a gallon of regular unleaded was $3.41 Wednesday, $1.30 more than a year earlier, according to AAA.
Francisco Blanch, head of global commodities and derivatives strategy at Bank of America, said oil could reach $120 a barrel by next year. On Wednesday, a barrel of West Texas Intermediate crude settled at $81.34.
Fuel oil prices rose 12.3% in October and are up 59.1% over the past year, according to the CPI report. Energy prices overall rose 4.8% in October and are up 30% for the 12-month period.
"I think we are in a bit of a world of contradictions, and oil is in the bullseye of many of the contradictions," said Blanch. "Oil has been the biggest laggard in the energy space. Every single commodity has been skyrocketing for the last 18 months, and oil is back to $80."
Blanch said demand could continue to push the price higher, and users of natural gas have been substituting oil as prices of that commodity rise.
"The thing with oil is we are about to experience a big resurgence in international travel," he said. International flights are just beginning to rebound, and demand for oil is about to increase as airlines buy more jet fuel.
"It could be 1.5 million to 2 million barrels [more demand] by the middle of next year," Blanch said. But then he expects prices to begin to move lower in 2023. "I think at some point we start to slow down demand," he added.
Swonk said Hurricane Ida, which shut in some U.S. oil and gas production for weeks, affected the price as well. "Clearly Hurricane Ida made it worse. There's also a lot of other things going on here: Covid, climate change, demand surge," she said.
Paying the rent
Another area that is likely to get even hotter is shelter costs, about a third of CPI and so far relatively muted.
JPMorgan economist Daniel Silver notes there were large jumps in the main rent measures, and industry data suggest there could be even more increases.
"Tenants' rent increased 0.42% in October, slightly softer than the September increase but still one of the firmest changes in recent decades," he wrote. "Owners' equivalent rent, meanwhile, jumped 0.44% in October, a touch above the September gain and the largest monthly increase since 2006."
National median rents are up 16.4% since the beginning of the year, according to Apartment List.
Swonk said housing has not returned to its pre-Covid level yet. "Housing could add over a half percent to overall inflation next year and even more to the core. It's a third of the total CPI, but it's even bigger on the core," she said.
Wage spiral
Workers wages have been gaining at a rapid clip this year, but not as much as inflation. Economists said they expect more wage increases to come, which tend to be sticky — that is, a cost that doesn't easily abate for employers.
It is also an area that can become locked into the rising costs of other essentials, like housing.
Average hourly wages were up 0.4% in October, nowhere near the 0.9% jump in inflation.
"It's not a wage price spiral like the 1970s or 1960s, but you could go through a period in time where you have a temporary wage price spiral, which gives this more longevity than we would like," Swonk said.
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Fuel, housing costs boosted October’s inflation. Here’s what it means for the Fed’s stance on interest rates - CNBC
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