Behind highest U.S. inflation charge in 31 years lurks worry that Federal Reserve has `misplaced management’ of shopper costs

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The highest US inflation rate in nearly 31 years, after months of complacency in the financial markets, is now raising fears that it may accelerate further and that the Federal Reserve may have missed its best chance of keeping prices stable.

Investors flocked to hedges like gold and digital currencies after Wednesday’s Consumer Price Index, which hit a 6.2% year-over-year headline in October, while a major investment firm raised prospects for a 7% CPI over the next few Months ago, the Federal Reserve’s long-running “passing” narrative about inflation was being challenged.

The massive sell-off in US Treasuries, the asset class hit hardest by inflation, showed growing alarms on Wednesday, causing the 10-year TMUBMUSD10Y, 1.553% and the 30-year TMUBMUSD30Y, 1.909% yield to make their largest single-day gains in months . A measure of inflation expectations for the next five years, the so-called 5-year breakeven rate, also reached a record high. Meanwhile, investors like Jay Hatfield of Infrastructure Capital Advisors, along with Stifel chief economist Lindsey Piegza, warn that the Fed has lost “control” over inflation.

“The Fed has absolutely lost control of inflation and inflation expectations, or at least it looks like it,” Piegza said by phone on Thursday. “Policymakers should have started pulling loose policies much sooner earlier this year, when inflation showed signs of going beyond what most economists would temporarily want.”

“But they stuck to their assessment that this is only temporary,” she said. “The fear is not that at some point they will not be able to curb price pressure, but that they may now have to move faster than they should have otherwise. By waiting for a long time, they created an even more difficult challenge for themselves. “

The Fed’s best tool to fight inflation could be to raise interest rates, which will come next year at the earliest and, given the long, variable delays in policy, may not affect the economy until 2023. The central bank has taken the first step in tightening monetary policy by starting to reduce its monthly bond purchases over the next few months. Meanwhile, the CPI’s annual headlines are at 5% or higher for six straight months, well above the Fed’s 2% target.

Wednesday’s CPI was enough to convince Newport Beach, California-based pension fund giant PIMCO to reassess its own expectations.

After PIMCO revised its CPI forecast for the fourth quarter upwards last month, PIMCO revised its forecast again on Wednesday following the release of US government data. The company is now seeing an annual core CPI that excludes food and energy, peaking at 6% and hitting 2.6% in late 2021 and 2.6% in late 2021 and 2022, said Tiffany Wilding, North American economist at PIMCO. PIMCO also predicts the headline CPI rate is likely to hit 7% over the next several months.

In June, she and Andrew Balls, PIMCO’s chief investment officer for global bonds in London, held on to the view that price pressures would prove temporary, saying they expected inflation in developed countries to peak in a few months would achieve.

A CPI value of 7% is “not outside the realm of possibilities,” said Piegza von Stifel. To make matters worse, a new head of the Fed could succeed Chairman Jerome Powell next year, she said. “I’m really very concerned about the increasing political influence on monetary policy in general – but also specifically on keeping interest rates low – and that the Fed is taking this permanent, passive position on the sidelines by giving politicians the right course leaves. ”

US Treasury markets were closed Thursday for the Veterans Day holiday, but stocks continued to trade. The S&P 500 SPX, + 0.14% and the Nasdaq Composite Index COMP, + 0.68%,
which have become increasingly insensitive to inflation, recovered somewhat after the losses earlier this week, while the Dow Industrial fell below 36,000 in morning trading due to the poor quarterly results of Walt Disney & Co. DIS, -6.37%

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