Last week, Fed leaders and politicians suggested that the Fed’s interest rate hikes might have not had enough time to create impact.

Last Wednesday, the America’s preferred inflation measure for producers and companies, the Producer Price Index came in hot.

  • It rose by +0.4% in the month of September, more than double what analysts expected.
  • It erased the PPI’s surprise dip in the month of August, plus half of the negative stride in July.

And though the PPI wasn’t a sure way to predict the CPI, when it was reported today, it too was pretty hot:

  • Cleveland’s Fed has a forecasting tool called Nowcasting. It’s showing moves higher in the CPI for September and October. Nowcasting forecasted September CPI rising by +0.32%.
  • In September, it rose +0.4%. Core inflation, a separate metric, rose by +0.6%. Both figures were above what analysts expected.
  • Inflation marched to a new 40-year high, with Nowcasting projecting another aggressive march in October.

Nowcasting’s worrying outlook has been supported in a global sense as inflation has marched higher in most industrialized economies, even in spite of central banks starting a campaign of rate hikes meant to arrest inflation:

  • The International Monetary Fund has warned that global inflation has yet to peak in a recent report, suggesting that the peak will come later this year.
  • Singapore’s Central Bank had the same conclusion in July, where it expressed that “inflation is expected to get worse to get better” and suggested that “a slowdown in economic growth is necessary” to end inflation.
  • Analysts are banking on inflation being high for September across many economies. Along with the U.S’s inflation rate report tomorrow, we’ll get data out of Germany — analysts are looking for a nearly 2% rise month-over-month in inflation.

Related: America is Hot. Other Countries? Not So Much.

What’s the outcome of higher inflation?

Well, a high readout nearly guarantees that the Fed will pile on the rate hikes—something which could be negative for stocks in the near-term.

  • The Fed Funds Rate is already 3.00-3.25%, which is the highest it has been since the ‘08 crisis.
  • The Atlanta Fed expects interest rates to rise to 4.5% by the December meeting according to its market probability tracker.
  • To get to 4.5%, the Fed will have two opportunities to hike rates—one in November and another in December.
  • High inflation means that the Fed will likely frontload a 1.00% (100 basis point) hike at its next meeting in November.

The Fed currently projects peak interest rates to hit 4.6% in 2023, a target which also likely move north if the Fed feels that inflation is not sufficiently arrested.

However, a substantial portion of the inflation picture hinges on factors that neither politicians or Fed chairs can do much about—the price of oil, natural gas, labor, and other superior goods are all important considerations which could affect inflation.

The Fed is simply doing its job by pulling the levers at their disposal—and interest rate hikes are one of the best ways they can slow the economy. Naturally, that rouses concerns they might pull the lever too aggressively, plunging the economy into recession.

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