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Rising inflation raises concerns about the possibility of a hard landing for the US economy

Hopes that the Federal Reserve could make a soft landing for the US economy took a hit on Tuesday as a key measure of inflation beat forecasts and triggered a sharp sell-off in the US economy. Wall Street.

The consumer price index rose 0.1% in August, well above economists’ expectations for a 0.1% decline. Most worrisome for policymakers, core inflation – which includes volatile items like energy and food – rose 0.6 per cent for a year-on-year increase of 6.3 per cent, compared with 5.9% was recorded in July.

The data from the Bureau of Labor Statistics ended a brief respite for Fed officials after results in July showed prices hadn’t risen month over month.

Wall Street is caught off guard by hotter-than-expected inflation figures. The S&P 500 index closed down 4.3%, its worst performance since June 2020. The Nasdaq Composite, which ranks alongside technology companies more sensitive to changes in interest rate expectations, was ended Tuesday 5% lower.

Line chart for September 13, 2022 (%) shows US stocks' biggest drop since June 2020

In the government debt market, yields on two-year US Treasuries, which are more sensitive to interest rate expectations, were up about 0.2 percentage points at 3.75%, trading at 3. 52% before the release of inflation data.

The odds Federal Reserve The CME Group will opt to raise rates by full percentage points in September, to around 30%, according to CME Group, from 0% at the start of the week. Most economists are forecasting another 0.75 percentage point rate hike, which would lift lending rates to a new target range of 3% to 3.25%.

Steven Blitz, chief US economist at TS Lombard, said Tuesday’s data combined with rising wages and a tight labor market means the Fed “is not going to make a fairy tale soft landing.” . He added: “The Fed is better able to roll out an 8 than the soft landing technique.”

“We don’t really see anything that would make the Fed want to choose a slower rate hike this month,” said Brian Coulton, chief economist at Fitch Ratings.

US President Joe Biden and his economic advisers had also hoped to reduce the headline figure, going as far as to schedule a “celebration” of his recently passed Inflation Reduction Act, a package health care and climate policy.

Although Tuesday’s event was scheduled to push through the bill, the optics were quickly taken over by Biden’s opponents in the Republican party.

“You can’t make it up: Hours after this terrible inflation report, the White House is celebrating ‘reducing inflation,'” Mitch McConnell, Senate minority leader, wrote on Twitter. “Democrats have thrown our economy into disaster and now they’re partying while families pay. They couldn’t look more out of place if they tried.”

Inflation has spiked despite falling gasoline prices in recent months. Earlier this summer, they topped a record $5/gallon after oil prices skyrocketed following Russia’s invasion of Ukraine. According to the American Automobile Association, the current national average is $3.70.

In recent weeks, Fed policymakers have reaffirm their commitment brought inflation under control and warned of the risks associated with allowing price pressure to continue.

Chairman Jay Powell and Vice Chairman Lael Brainard cannot bring down inflation, and letting future price increases expect more economic gains. said last week.

Policymakers fear the downward trend in gasoline prices is unsustainable – especially if energy prices soar later this year. Finance Minister Janet Yellen warned of that possibility over the weekend, citing concerns about widespread shortages across Europe as the bloc stops buying oil from Russia.

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