WASHINGTON (BLOOMBERG) - After United States prices climbed by the most in three decades, there is even worse news ahead for households and policymakers: Inflation likely has further to rise before it peaks.
Last month's annual rate was 6.2 per cent, the highest since 1990, as price increases spread well beyond the parts of the US economy most disrupted by pandemic closures. Key drivers, like hot housing markets and a global energy crunch, show few signs of fading away soon - leading economists to predict even bigger jumps in the coming months.
"We're going to see the inflation picture get worse before it gets better," said Wells Fargo & Co senior economist Sarah House. She does not expect much relief before next spring. For the Federal Reserve, and US President Joe Biden, that likely seems a long way off - and pressure for a change of policy course will ratchet up in the meantime, as calls to rein in pandemic support grow louder.
Surging prices are eating into family budgets, wiping out the wage increases that US workers have battled for after last year's jobs wipe out, and squeezing profit margins for small businesses.
The Fed has already begun to back away from the case it has been making since Covid-19 first arrived: That pandemic inflation will be "transitory". It is starting to wind down bond purchases this month, and leaning toward raising interest rates next year instead of waiting until 2023. Wednesday's inflation data could accelerate the timetable.
The US central bank may have arrived at a "tipping point", said Mr James Knightley, chief international economist at ING. "Is it really justifiable to be continuing to stimulate when you've got the economy growing at 6 per cent and inflation increasing at 6 per cent and no sign that there's any loss of momentum in either of those indicators?"
Mr Knightley expects the Fed's so-called taper to be concluded in the first quarter of next year - about three months ahead of the consensus schedule. And he foresees two 25 basis-point rate hikes to follow by the end of the year, with a growing likelihood that could turn into three.
That is roughly what financial markets expect too. Investors have been betting on a speeded-up hiking cycle for nearly two months. After Wednesday's inflation numbers, yields on five-year Treasuries rose more than 10 basis points.
Not the 1970s
An acceleration of the timetable could show up at next month's meeting of the rate-setting Federal Open Market Committee, said Dr Michael Feroli, chief US economist at JPMorgan Chase & Co. Last time the Fed released a so-called "dot-plot" in September, it showed an even split on whether rates will rise next year.
"It is reasonable to suspect you could get the median to move higher," Dr Feroli said.
Bloomberg Economics' Anna Wong says: "We expect headline inflation may top 6.8 per cent year on year in November. The main factors would be persistent price gains for energy and shelter and adverse base effects."
Fed officials acknowledge that inflation is sticking around longer than they had expected. They fret that households and businesses may come to expect more of the same, the kind of change in expectations that can prove self-fulfilling. But they still reckon many price increases are essentially a one-off.
There is no reason why the energy spike of this year, or the big shift in housing markets driven by work-from-home, should repeat themselves in future years, the argument goes. And labour is not strong enough to keep bidding wages up like it did in the 1970s. That is why there will be plenty of resistance inside the Fed to any abrupt shift towards tighter policy.
"Inflation is high, it's eye-popping," Dr Mary Daly, president of the San Francisco Fed and one of the central bank's most dovish officials, told Bloomberg TV on Wednesday. Still, "right now it would be premature to start changing our calculations about raising rates", she said.
"Uncertainty requires us to wait and watch with vigilance."
Mr Biden, whose party suffered a reversal in state elections last week and must defend thin Congressional majorities in mid-term voting next year, is in the firing line too. Inflation is high on the list of public grievances, and the President called it a "top priority" after Wednesday's data.
One problem for Mr Biden, as he tries to get a US$1.75 trillion social-spending plan through Congress, is that he needs votes from centrists like Senator Joe Manchin of West Virginia - who has voiced concerns that more public spending could make inflation worse.
On Wednesday, Mr Manchin called for action against soaring prices, without saying what kind.
Still, it is the Fed - which is supposed to be responsible for managing inflation - that is more directly in the firing line. In the last couple of years the central bank has come up with a new policy framework, essentially allowing it to keep rates lower even when inflation stays a bit above the 2 per cent target, and rolled out emergency programmes to dig the economy out of a deep pandemic hole. Through all of this, it has stressed the importance of accommodative monetary policy to boost employment and growth, and allow wages - especially for low-income Americans - to keep rising.
But those arguments, drawn up in a world where inflation rarely got near 3 per cent, are getting harder to sustain at 6 per cent plus.
"The fact that inflation is off the business page and on the front page is a problem for an institution trying to preserve its reputation," said Dr Feroli. "They are in a tough spot."