As the Federal Reserve discusses its next interest rate decision, September's consumer price index (CPI) will be the latest test of whether inflation continues to slow.
The report, due at 8:30 p.m. Beijing time on Thursday, is expected to show that overall inflation rose 2.3% year-on-year, down from 2.5% in August, the lowest level since early 2021. On a month-on-month basis, overall inflation is expected to rise 0.1%, cooling from 0.2% in August. Core inflation, which excludes volatile food and energy costs, is expected to rise 3.2% year-on-year in September, the same as in August; while the month-on-month growth rate will slow slightly to 0.2%, from 0.3% in August.
While U.S. inflation has moderated, it remains above the Fed’s 2% annual target. But the Fed has recently turned its attention to the labor market, which has proven surprisingly resilient in the face of higher interest rates.
Data on Friday showed the labor market added 254,000 jobs in September, beating economists' expectations for 150,000, while the unemployment rate fell to 4.1% from 4.2%.
The strong report changed expectations for the future path of interest rates, with markets now pricing in a modest 25 basis point rate cut by the Fed in November, rather than another large 50 basis point cut.
“We see a high bar for the Fed to not cut rates at all in November,” Citi economist Veronica Clark wrote in a note to clients on Monday. “Ultimately, we expect the still-muted backdrop of inflation and the reemergence of labor market slack trends in coming months to keep officials on track to cut rates by 50 basis points in December after a modest 25 basis point cut in November.”
However, markets could still be spooked if inflation data comes in too hot.
“As long as inflation doesn’t blow up, good news is good news for stocks,” Ohsung Kwon, equity strategist at Bank of America, wrote on Monday. “Following last Friday’s blowout jobs report, we think the importance of this week’s CPI has risen.”
“While equities should be able to withstand small upside surprises on inflation given improving macroeconomic data, sizable surprises could introduce uncertainty into the easing cycle and bring more volatility to markets,” he warned.
Housing inflation and core services inflation are sticky
For the Federal Reserve, the biggest challenge in fighting inflation at present is that the core inflation rate has remained high, and the costs of core services such as housing, insurance and health care are still high.
“We see a risk that owner equivalent rent strengthens relative to our expectations,” said Citi’s Clark. Owner equivalent rent is the rent a homeowner would expect to receive if they put their home on the market. It is a subset of housing indicators and one of the largest individual components of the CPI.
Bank of America believes that rising sticky rents, away-from-home lodging prices, used car prices and airfares are likely to translate into a stronger month-over-month core CPI in September, even though prices in the latter two categories fell in August.
“While we expect core CPI to firmer in September than in recent data, our forecast does not change our medium-term outlook for further moderation in inflation,” Bank of America economists Stephen Juneau and Jeseo Park wrote in a data preview. “A cooling labor market, combined with stable inflation expectations, should keep disinflation on track.”
However, both banks added, “There are still some upside risks to consider, including East Coast port strikes, higher oil prices, and higher shipping costs. These risks would lead to a more gradual disinflationary process than we currently expect.”
The article is forwarded from: Jinshi Data
