Markets seem to be brushing off the acceleration in inflation, but I'm concerned investors might be downplaying its potential fallout.
For the first time in six months, we're seeing a rise in core inflation. A 0.3% month-over-month increase might not sound like much compared to 0.7%, but it's still considerably above the Fed's target.
The 0.6% spike in the Consumer Price Index (CPI) caught me off guard as well. The surge in gasoline prices since early July, up by 9.4%, likely contributed to this development.
As oil prices continue their upward trajectory, we might witness gasoline's significant influence on September-October CPI figures. As I’ve previously pointed out, this isn't a scenario the Fed would appreciate.
All of the above suggests that elevated interest rates might linger longer than many of us would like. Cutting rates at this juncture could trigger a sharp inflationary spike, especially when inflation's descent is already proving sluggish.
The repercussions of these sustained high rates are evident in the rising average interest rate on U.S. government debt. After standing at just 1.56% in January 2022, it shot up to 2.92% in August. Now, new Treasury Bills are being issued at rates exceeding 5%.
This implies that, over the next year, the Treasury's interest payments alone could surpass $1 trillion. While the Treasury might weather this storm by borrowing more, those without the Fed's backing could find themselves in a tighter spot.
The longer these rates persist, the greater the chance of significant economic and market disruptions. Ironically, it might take these very disruptions to prompt a rate reduction.
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