June 5, 2023

US inflation cools just a little, keeping a big Fed hike in play

(Bloomberg) — U.S. inflation eased only slightly in October data on Thursday, and another higher-than-forecast reading could dash expectations that the Federal Reserve will move downward from steep rate hikes.

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Economists predict the CPI and the core measure excluding food and energy will both cool year-on-year, but still be in line with continued and elevated inflation. The overall consumer price index has risen from the previous month by the most since June.

That keeps a fifth consecutive 75 basis point rate hike on the table at the Fed meeting next month, although traders are leaning more toward half a point. The rise in prices has also pushed the Fed to see a higher top interest rate next year than officials predicted a couple of months ago.

In any case, the still tight labor market highlights the relatively slow decline in inflation in the coming months, which has been an important factor in this week’s midterm elections. The annual headline inflation rate exceeded forecasts in six of the previous seven months.

“An upward surprise would be more likely to be driven by underlying strength and, combined with the resilient jobs report, would raise the risk that key interest rates will need to go higher to curb inflation,” Citigroup Inc. economists Veronica Clark and Andrew Hollenhorst said. note.

Predictions of major banks:

Company CPI (MoM) Core CPI (MoM)

Bank of America 0.5% 0.4%

Citigroup 0.6% 0.4%

Deutsche Bank 0.6% 0.5%

Goldman Sachs 0.5% 0.4%

JPMorgan Chase Securities 0.6% 0.4%

Morgan Stanley 0.7% 0.5%

Wells Fargo 0.6% 0.5%

The Fed is on its most aggressive rate hike campaign since the 1980s to curb demand across the economy, including for labor. Chairman Jerome Powell said last week that the central bank wants softer labor market conditions to curb inflation, but so far that hasn’t happened in an “obvious” way.

Richmond Fed President Thomas Barkin said at an event Wednesday that the central bank is doing everything it can to get inflation back to its 2 percent target.

“The Fed cannot allow inflation to rise and expectations to rise,” said Barkin, who will not vote on monetary policy this year. “If we back down in fear of a recession, inflation will return even more and require even more restraint.”

Friday’s report showed the United States added more jobs than expected in October and average hourly earnings accelerated from September. Even if wage increases do not keep pace with inflation, they still help give Americans the conditions to continue spending and raise labor costs for businesses, which in turn maintains upward pressure on prices.

“If the labor market surprises us with strength and resilience, we shouldn’t expect a different outcome in terms of consumer prices,” said Carl Riccadonna, chief economist at BNP Paribas. “One thing follows another. Labor turns slowly, and so does inflation.”

While looking at the subtleties of inflation reports, Fed officials are also concerned about the impact of big headline numbers on consumers’ wage and price expectations.

“They let the headline get away from them and they want to drop the headline to two percent,” said Lara Rhame, chief economist at FS Investments. “They focus on top-level calculations on an annual basis.”

Other components

The headline figure, which was 8.2% higher in September than a year ago, reflects widespread price pressure across the economy. In recent months, some of the biggest contributors have been food, medical care and shelter.

Although some housing prices and rents have slowed or even fallen in recent months, it will take some time for them to show up in the CPI. Fed Governor Christopher Waller said last month that if home prices continue to rise rapidly, other components of the core inflation basket “would have to moderate significantly” to achieve the lower headline inflation readings that Fed officials are aiming for.

What Bloomberg Economics Says…

“Consumer price inflation is decelerating on an annual basis, but we don’t expect shorter-term interest rates to approach the Fed’s 2 percent target anytime soon… Signs of inflation slowing in the staples sector will be met by robust basic services inflation led by rents.”

— Anna Wong, Andrew Husby and Eliza Winger, economists

For the full note, click here

One area where inflation is cooling is in goods – such as cars and clothing – reflecting improved supply chains and shifting spending patterns to services. But this moderation has not nearly compensated for the price pressures caused by services.

In September’s consumer price index, core services, which do not include energy, rose 6.7% year-on-year in the largest annual advance since 1982. The institute’s October survey of manufacturers showed that materials prices contracted for the first time since 2020, while costs accelerated, according to the group’s services report.

Thursday’s report may also signal a turnaround in health insurance costs, which have risen more than 2% on average this year, and the broader medical care services category, according to Omair Sharif, founder of Inflation Insights LLC.

According to Bloomberg economists, the pandemic and subsequent economic recovery caused large swings in the cost of medical care, which are expected to weigh on the CPI. Another wrinkle is that the government now includes Medicare Part D premium and benefit costs in the retained earnings calculation.

— with assistance from Vince Golle and Kristy Scheuble.

(add Barkin’s comment to the eighth paragraph)

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