‘Sinking Under Water’: Americans Feel the Inflation Squeeze as Prices Outpace Wage Growth, Economist Says — Warns 50-Basis-Point Fed Hike Is Back on the Table

Over the past year, estimated consumer prices rose 4% while wages increased 3.1%, implying a roughly 0.9-percentage-point squeeze on purchasing power, according to Justin Wolfers, economist and host of Platypus Economics. This dynamic leaves average workers feeling like they are “sinking under water,” Wolfers stated.

Inflation ‘Still Too High‘, Says Expert

The October Consumer Price Index report showed a 0.4% month-over-month increase for the headline number and a 0.3% increase for core inflation. These current numbers are “still too high for the Fed,” stated Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.

While the headline number slowed from a 0.6% increase in September, Zaccarelli noted the 0.4% figure was a disappointment compared to the expected 0.3% increase.

Meanwhile, Wolfers cited the Iran war in his podcast dated Nov. 11, and said that “the cost of living has surged again over recent months. That’s the direct effect of the Iran war. And so over the past year, prices have risen faster than wages.”

“That’s why it feels like you’re sinking under water a little bit,” he added.

A ‘Double Helping’ Rate Hike?

Following the report, markets rate a December Federal Reserve rate hike as a certainty, according to Wolfers. Wolfers flagged that markets now see a 15% chance that the Fed goes for a “double helping,” raising rates by half a percentage point instead of the usual quarter point.

This follows comments from Fed Governor Chris Waller, who stated before the release that a 0.3% core reading should put a 50-basis-point hike on the table, Wolfers noted.

Zaccarelli added that given the higher-than-desired inflation, a December rate hike is more likely. However, his firm expects the Fed will only raise rates by 0.25% next month. Zaccarelli warned that a more aggressive Fed “could prove to be too big of a headwind for the market to overcome next year.”

Holiday Travel Demand

The data also points to a costly holiday season, with the “most expensive part” of Thanksgiving being the travel required to get there, Wolfers said. Wolfers cited that airfares are up 28% and gasoline is up 38% over the past year.

Jeffrey Roach, Chief Economist for LPL Financial, stated that inflation is partly a “demand-driven problem, not just supply-induced.” According to Roach, higher airline fares have not slowed flying demand, with travel remaining above last year’s levels despite rising costs.

How Has the Stock Market Performed?

The S&P 500 index has advanced 9.66% year-to-date. Similarly, the Nasdaq Composite index was up 7.88%, and the Dow Jones gained 7.96% YTD.

On Tuesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed lower. SPY was down 0.37% to $749.92, while QQQ declined 0.68% to $674.76. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), ended 0.31% lower at $521.73.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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