At 8:30 Wednesday morning the Labor Department put out one number. Within half an hour the bond market had changed its mind about the Fed. Consumer prices rose 3.7% in September from a year earlier. That's up from 3.4% in August and above the 3.6% economists expected. The part that stung sat underneath the headline.
Core prices leave out food and energy. They rose 0.3% for the month. Forecasters wanted 0.2%. Over a year, core is up 2.6%. The Journal's Konrad Putzier quoted Lindsey Piegza of Stifel, who called it “dangerously elevated levels of inflation.” Gasoline rose 9.1% in one month and 34% over the year. Fuel oil is up 74% since last September. The Iran conflict began at the end of February, and the pump hasn't recovered.
The worry isn't the gas. It's what the gas is dragging along with it. Airfares are up 22% over the year. Coffee is up 7.1%. Dental visits are up 6%. Streaming and hospital bills rose too. Samuel Tombs of Pantheon Macroeconomics called it “broad-based inflation pressure.” The University of Michigan survey shows people expect 4.7% inflation over the next year, up from 4.6%.
The Fed's closer call
The Fed raised rates in September, its first hike in three years. Officials had signaled they didn't plan an October move. Then this report landed. Futures odds of a hike at the Oct. 27–28 meeting jumped from 22% to about 50%, and ended the day near 33%. The 10-year Treasury yield touched 5.329% after the report and closed at 5.189%. Stocks had their worst day since July. The S&P 500 fell 1.1% and the Nasdaq fell 1.9%, as a selloff in AI names took over by afternoon.
Here's the number that explains the mood. Hourly pay rose 3% over the year. Prices rose 3.7%. That's the sixth month in a row that inflation outran wages. The Journal's editorial page put it in plain terms. Real average hourly earnings fell 0.5% in September and are down 0.7% over 12 months. People are working the same hours and buying a little less.
Our read
This is Cash Flow · M5 with a Fixed Income · IN02 lesson inside it. In September we wrote down three conditions for putting new money to work. Core inflation at or under 0.1% for a month. The Fed not raising. And the VVIX, the market's fear-of-fear gauge, under 90. This report failed the first one. The Fed failed the second when it hiked in September. By our own pull, the VVIX closed above 90 on Wednesday and stayed there. None of the three pass, so we bought nothing this week. Safe money stays in Treasury bills and floating-rate paper (SGOV in 49 books, USFR in 14). Long bonds stay out (TLT in 4 older books; nothing added). By our own pull, the S&P 500 closed Friday, Oct. 16 at 7,659.44, down 1.09%.
The one line in your own plan this story touches is the emergency fund. Inflation ran 3.7%. The average bank money-market account pays 0.45% a year, by the Journal's rate table. A 4-week Treasury bill paid 4.000% at Thursday's auction, by Friday's paper. That gap is the whole story for the cash you keep for a bad month. This week's check is simple. Open the statement, find the yield on your emergency fund, and hold it next to 3.7%. If the yield starts with a zero, the money is losing ground to prices while it sits. You don't wait for the roof to leak to find out where the bucket is. It's a ten-minute check, and it's the first thing we'd look at together in a review.