US Consumer Price Index: Falling real wages and the Fed’s credibility problem

  • The Consumer Price Index soars 6.2% in October, fastest since December 1990.
  • Core prices, minus food and energy costs, climb 4.6%, the most since November 1990.
  • Treasury yields and the dollar jump, fed funds futures move toward three hikes in 2022.

Inflation became more than a headache for American consumers as prices for a wide spectrum of everyday goods rose at their fastest pace in more than 30 years. 

The Consumer Price Index Index (CPI) jumped 0.9% in October and was 6.2% higher than a year ago, reported the Labor Department on Wednesday. This compared to forecasts from the Reuters survey of economists of 0.6% and 5.8% and September’s increases of 0.4% and 5.4%.



Core inflation, which excludes food and energy prices on the logic that their volatility is often transitory, soared 0.6% for the month and 4.6% in the year, also the highest pace since 1990, following 0.2% and 4% increases in September. 

Analysis: Wages lose ground to inflation

Wherever consumers look, from gasoline and fuel oil with winter on the way, to food, cars and housing, everything is more expensive. 

Food costs climbed 0.9% in October and are up 5.3% since last October. Staples like meat, poultry and eggs are 1.7% more costly on the month and 11.9% on the year.  

Fuel oil for heating, used mainly in older homes in the Northeast, rose 12.3% in October and is up 59.1% year over year. Gasoline, a necessity for the vast majority of Americans, soared 6.8% last month and is 60% higher since October 2020.  

New automobile prices were 1.4% higher for the month and 9.8% over the year. Used car prices climbed 2.5% and 26.4% respectively, driven higher by a scarcity of many new models due to the computer chip shortage. 

Housing expenses, including home and rental costs, rose 0.5% in October and are 3.5% higher on the year. These prices comprise about one-third of the CPI calculation.  Because rental and mortgages are long term contracts, increases in this category become permanent additions to household expenses. 

Average Hourly Earnings rose 4.9% for the year in October and 0.4% in the month. At a 6.2% annual inflation rate and 0.9% monthly, the purchasing power of wages fell 1.3% and 0.5% in the respective periods.  

Average Hourly Earnings


When consumers see their real income (wages minus inflation) drop month after month as inflation erodes buying power, the demand for compensatory wage increases can rise proportionally. When combined with the higher salaries already offered by many employers in an effort to secure scarce workers, the wage side of a wage-price spiral can become much more emphatic. 

Market response

Treasury yields were sharply higher  after the CPI data and continued to rise throughout the day. 

US Treasury yields


By early afternoon the 10-year yield had added 10 basis points to 1.546%. The 5-year yield had climbed 12 points to 1.188% and the 30-year was trading at a 1.908% yield, up 9 basis points. 

The dollar was higher in every major pair. The euro dropped below 1.1500 for the first time since July 2020 and the USD/JPY briefly rose above  114.00 while the sterling fell more than a figure to 1.3432. 

All three major equity averages lost ground, with the Dow down 254.54 points, 0.70% to 36,065.54  in the late afternoon and the S&P 500 off 0.97% 45.51points to 4,6439.74. The NASDAQ was lower by 304.05 points, 1.91% to 15,582.50.  

Fed policy

The October CPI data, which presages the Personal Consumption Expenditure (PCE) Price Index data at the end of the month complicates Fed policy enormously.  The Core PCE Price Index, the Fed's preferred measure, has mirrored the gains in CPI. The September PCE rates of 4.4% in headline and 3.6% for core were the highest on record and should increase when the October data is released by the Bureau of Economic Analysis on November 24. 

Central bank and government policymakers have maintained for several months that price gains will be limited and temporary. That assertion has become increasingly hard to credit when CPI has more than quadrupled from 1.4% in January to October’s 6.2% and has averaged 5.5% for six months.  It is even more difficult to believe when one of the major factors in the surge in CPI is the increase in costs for the long term contracts in the housing market. 

When the Fed announced its long-awaited bond taper at this month's Federal Open Market Committee  (FOMC) meeting, the $15 billion monthly reduction was specified for November and December only. 

The FOMC statement said that while the committee expected that the cuts would continue, the decisions for next year would be determined  by economic conditions. 

Chair Jerome Powell has been at pains over the last several months to assure that a reduction in the bond program, even to its demise this coming June, does not mean a fed funds rate hike is imminent. 

That condition has become harder to believe. In the September Projection Materials the Fed governors estimated that the fed funds would likely get one 0.25% hike next year. 

Predictions from the Chicago Board Options Exchange (CBOE) compiled from futures accounts in the fed funds show a very different picture. 

The first 0.25% increase is expected at the June 15 meeting. A second hike is expected at the November 22 FOMC and the final meeting of the year on December 14 currently has a 49% chance of a third hike. 


The Federal Reserve has spent almost two years focusing its monetary policy on the US labor market. Even though US payrolls remain several million below their pre-pandemic levels, the Fed now finds that its rate policy is being set by its old nemesis, inflation. 


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD slides sub-1.1300 as the dollar accelerates advance

EUR/USD finally broke below 1.1300, helped by encouraging US employment-related figures ahead of the November jobs report. ECB officials still holding back on tapering.


GBP/USD clings to modest recovery gains above 1.3300

GBP/USD is edging higher toward 1.3330 in the second half of the day on Thursday as the greenback stays under modest selling pressure. The US Department of Labor reported that there were 222,000 initial claims for unemployment benefits last week.


Gold: Bears back in control and target the $1,750s

The price of gold has been on the backfoot while the greenback consolidates and risk appetite improves. The US stock market has surged back to life with the S&P 500 running up over 1.6% on the day so far.

Gold News

Litecoin price must hold critical support to avoid crash to $100

Litecoin price shows significant weakness on its daily chart, with the current support at $200 showing signs of failure. Litecoin price is currently trading against some strong support at the $200 level, though the support is unlikely to hold and more downside is expected.

Read more

Cyber Monday 2021 Discounts!

Glued to your trading screen on Cyber Monday? Upgrade your skills by signing up for FXStreet’s Premium service, offered at a discount of up to 50%. Fellow traders have already taken advantage of Black Friday profits. What about you? 

Subscribe now!