The U.S. Federal Reserve is widely expected to keep its key short-term interest rate unchanged when it meets next week. File
| Photo Credit: Reuters

An inflation gauge that is closely monitored by the Federal Reserve showed price increases remained elevated in September amid brisk consumer spending and strong economic growth.

Friday’s report from the Commerce Department showed that prices rose 0.4% from August to September, the same as the previous month. And compared with 12 months earlier, inflation was unchanged at 3.4%.

Taken as a whole, the figures the government issued Friday show a still-surprisingly resilient consumer, willing to spend briskly enough to power the economy even in the face of persistent inflation and high interest rates. Spread across the economy, the strength of that spending is itself helping to fuel inflation.

In a cautionary note, consumers relied increasingly on savings to fuel their shopping last month. Income growth slowed. Adjusted for inflation, income actually fell slightly.

Yet spending jumped 0.4%, after adjusting for inflation. The saving rate fell to 3.4%, down from the 6%-plus average before the pandemic.

“That is clearly unsustainable, and we expect spending growth will slow sharply in the quarters ahead,” said Michael Pearce, lead U.S. economist at Oxford Economics, a consulting firm.

September’s month-to-month price increase exceeds a pace consistent with the Fed’s 2% annual inflation target, and it compounds already higher costs for such necessities as rent, food and gas. The Fed is widely expected to keep its key short-term interest rate unchanged when it meets next week. But its policymakers have flagged the risk that stronger growth could keep inflation persistently high and require further rate hikes to quell it.

Since March 2022, the central bank has raised its key rate from near zero to roughly 5.4% in a concerted drive to tame inflation. Annual inflation, as measured by the separate and more widely followed consumer price index, has tumbled from the 9.1% peak it reached in June of last year.

On Thursday, the government reported that strong consumer spending drove the economy to a robust 4.9% annual growth rate in the July-September quarter, the best such showing in nearly two years. Heavy spending by consumers typically leads businesses to charge higher prices. In Friday’s report on inflation, the government also said that consumer spending last month jumped a robust 0.7%.

Spending on services jumped, Friday’s report said, led by greater outlays for international travel, housing and utilities.

Excluding volatile food and energy costs, “core” prices rose 0.3% from August to September, above the 0.1% uptick the previous month. Compared with a year earlier, though, core inflation eased to 3.7%, the slowest rise since May 2021 and down from 3.8% in August.

A key reason why the Fed may keep rates unchanged through year’s end is that September’s 3.7% year-over-year rise in core inflation matches the central bank’s forecast for this quarter.

With core prices already at that level, Fed officials will likely believe they can “proceed carefully,” as Chair Jerome Powell has said they will do, and monitor how the economy evolves in coming months.

Still, the data in Friday’s report showed that while prices for many goods, including cars, furniture and appliances are actually falling, the price increases for services remain chronically high.

Restaurant meals, for example, rose 0.4% in price from August to September, up from a 0.2% rise the previous month. They are now 5.8% more expensive than they were a year earlier.

One measure the Fed is monitoring closely — services prices, excluding energy and housing — jumped 0.4% last month, after rising only 0.1% in August. The Fed watches that gauge because it tracks prices in a set of industries that are labor-intensive and particularly sensitive to rising wages. Higher wages can fuel inflation if businesses pass on their higher labor costs by raising prices.

A solid job market has helped fuel consumer spending, with wages and salaries having outpaced inflation for most of this year. Yet Friday’s report showed that the growth in overall income — a category that, in addition to wages, includes interest income and government payments — has slowed. Adjusted for inflation, after-tax income slipped 0.1% in September, the third straight monthly decline. Shrinking incomes could weaken spending and growth in the months ahead.

Representational image only. File
| Photo Credit: Reuters

Equity benchmark indices declined in early trade on September 21, falling for the third day running, due to a weak trend in global markets and foreign fund outflows.

Global equities fell after the U.S. Federal Reserve signalled that they expect to raise rates once more this year to fight inflation.

The 30-share BSE Sensex fell 333.64 points to 66,467.20. The Nifty declined 99.8 points to 19,801.60.

Among the Sensex firms, HCL Technologies, ICICI Bank, Tata Consultancy Services, Larsen & Toubro, UltraTech Cement, Nestle, HDFC Bank and ITC were the major laggards. State Bank of India, Tata Steel, Axis Bank and NTPC were among the gainers.

In Asian markets, Seoul, Tokyo, Shanghai and Hong Kong were trading in the negative territory. The U.S. markets ended in the red on Wednesday.

The Federal Reserve left its key interest rate unchanged on Wednesday for the second time in its past three meetings, a sign that it’s moderating its fight against inflation as price pressures have eased. But Fed officials also signalled that they expect to raise rates once more this year.

“Even though the ‘hawkish pause’ from the Fed was on expected lines, the U.S. markets reacted negatively since the indication from the Fed is that rates will remain ‘higher for longer’.

“For Nifty the biggest drag will be more FII selling in response to the rising dollar and U.S. bond yields,” said V. K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Global oil benchmark Brent crude declined 0.71% to $92.87 a barrel. Foreign Institutional Investors (FIIs) offloaded equities worth ₹3,110.69 crore on Wednesday, according to exchange data.

“A rough start to the trading session is on the cards as overnight weakness in the U.S. markets has triggered a slump in other Asian counterparts after the U.S. Federal Reserve hinted at one more rate hike by the end of this year even as it kept rates unchanged in its FOMC (Federal Open Market Committee) meeting yesterday.

“Another negative catalyst has been the frenzied selling by foreign institutional investors as they sold shares worth ₹3,110.69 crore in the domestic equity markets on Wednesday, which could further dampen the sentiment,” Prashanth Tapse, Senior VP (Research), Mehta Equities Limited, said in his pre-opening market comment.

The BSE benchmark had tumbled 796 points or 1.18% to settle at 66,800.84 on Wednesday. The NSE Nifty declined 231.90 points or 1.15% to end below the 20,000 mark at 19,901.40.

Washington:

The US Federal Reserve voted Wednesday to keep interest rates at a 22-year high, while forecasting an additional rate hike before the end of the year to bring down inflation.

The Fed’s decision to keep its key lending rate between 5.25 percent and 5.50 percent gives policymakers time to “assess additional information and its implications for monetary policy,” the central bank said in a statement.

After 11 interest rate hikes since March last year, inflation has fallen sharply but remains stubbornly above the Fed’s long-run target of two percent per year — keeping pressure on officials to consider further policy action.

On Wednesday, the Fed said economic activity had been expanding “at a solid pace,” while noting strong job gains and a low unemployment rate.

A recent string of positive economic data has raised hopes that policymakers can slow price increases without triggering a damaging recession.

Alongside its interest rate decision, the rate-setting Federal Open Market Committee (FOMC) also updated members’ forecasts for a range of economic indicators, as well as expectations of future monetary policy.

FOMC members left the median projection for interest rates between 5.50 percent and 5.75 percent, keeping alive the possibility of another quarter percentage point hike before year-end.

They also lifted expectations for interest rates next year by half a percentage point, suggesting the Fed anticipates rates will have to stay significantly higher for longer in order to lower inflation to target.

FOMC members more than doubled the median projection for economic growth this year as well to 2.1 percent, from 1.0 in June, and sharply raised their forecast for next year.

The prediction for the unemployment rate in 2023 was lowered slightly from June, suggesting the jobs market is faring better than hoped, while the expectation for headline inflation was increased slightly.