By Howard Schneider

WASHINGTON (Reuters] – The Federal Reserve has reaffirmed its outlook that inflation will only cause “transitory” price rises. Inflation pushed through the economy more in October, threatening the Federal Reserve’s forecast for just temporary increases. Recent wage hikes were offset by inflation, causing investors to bet the central banks will increase interest rates faster than anticipated.

Yields on Treasury two-year notes rose six basis points on Wednesday to 0.455%, an indicator of the Fed’s overnight rate. This was after data showed that consumer prices rose 6.2% in October.

The increase was the most dramatic in one year in thirty years. This applies to both staples like energy and food as well as items such as automobiles. While the Fed expected price rises to slow due to pandemics-driven supply-chain bottlenecks worldwide, the Fed did not expect the rate of increases to be as rapid as they were.

These “bottlenecks”, however, are being overridden by U.S. consumers demand. Additionally, inflation measures that reduce the effects of sudden spikes or goods and services prices are increasing.

A “trimmed” Cleveland Fed index of consumer prices as well as one which tracks the median price increase surged, indicating that there was an upward trend in price pressures across more goods and services.

(GRAPHIC: Alternate inflation measures – https://graphics.reuters.com/USA-FED/INFLATION/znpnekxmdvl/chart.png)

One Fed policymaker said Wednesday that central banks should remain patient.

Mary Daly, president of the San Francisco Fed said that “we need to wait until we see how it percolates throughout the economy” before altering monetary policy to respond to it.

The market had an easier time. Investors increased the likelihood that the Fed will raise rates two times by increasing the price of futures contracts linked to the target federal fund rate by 0.50 percentage points cumulatively by September. The expectation of a December third quarter-point rate rise was nearly half that expected, compared with less than 30% Tuesday.

Federal Reserve policymakers have been increasingly concerned about the risks posed by inflation. Excessive accommodation over too long or essentially running an economy hot could lead to unintended consequences for the market that further erode confidence, and ultimately impair recovery,” Rick Rieder (NYSE:) chief investment officer global fixed income, investment giant Blackrock.

Given the expected increase in demand and supply, it is possible that “near-term” inflation readings could be frightening to “inflation fighters which might push central bankers to discuss an even faster response-function.

NOT ‘LINEAR.

The Fed as well as the Biden administration have tempered what had been an indefatigable belief in transitory inflation.

Biden’s Council of Economic Advisers stated on Twitter (NYSE 🙂 that “we know that the recovery form the pandemic won’t be linear” in reference to the fact that prices have risen faster than expected. The CEA said it would continue to “monitor the data as soon as they are in”.

Price increases have also had the disturbing effect of exceeding wage growths that Fed and White House wanted to flow to the lower-paid workers in hotel and restaurant industries, which were hardest affected by the pandemic shut downs in 2011 and cautious return to services in person.

Nick Bunker, Indeed’s research director in North America noted that inflation was almost entirely offset by the sharp wage increases in leisure and hospitality in October.

In October, real hourly earnings fell by 1.2%, compared with last year. The nearly 5% wage growth over the past 12 month was greater than the 6.2% increase in prices.

It continues to reverse what has been a steady rise of workers’ purchasing power starting around 2013, with low inflation helping “real” wages increase after many years of stagnation due to the 2007-2009 recession and financial crisis.

(GRAPHIC: Wages vs. prices – https://graphics.reuters.com/USA-ECONOMY/INFLATION/lbpgnblmjvq/chart.png)

According to the Fed, it will not raise interest rates until people are back to work after suffering from the pandemic. This is even though inflation may be higher than its 2% goal “for some time”.

Jobs-first is a departure from previous strategies that used higher unemployment to maintain prices under control. This effectively transferred the costs of inflation fighting onto jobless people during slowdowns.

While the Fed hopes that inflation will decrease over time without needing to raise interest rates to cool down the economy, it is still adamant about the risk of slowing and/or reversing the pace of job growth.

However, the more inflation data that exceeds expectations will make it harder.

“With annual inflation now topping 6%, is this sufficient to force the Fed’s hand? Seema Shah is the chief strategist of Principal Global Investors. She stated, “This long, long transitory time has to heap pressure upon the Fed.”