Inflation in Focus: Rektober to Uptober?
The Consumer Price Index report for September 2023 will be released on Thursday, October 12, at 8:30 a.m. ET. The headline consumer prices are expected to rise by 0.3% M/M in September (prev. +0.6%), and the core rate of inflation is expected to rise by 0.3% M/M (prev. +0.3%). The upside in gasoline prices is likely to support the headline. While inflation pressures will continue to ease through year-end, the moderation will be rockier than over the last year. This is particularly true for headline inflation, where a reversal in energy prices will contribute to upward pressure in the near term. The data will be framed in the context of Fed policy, where any upside, particularly in core prices, will likely tilt the market's implied path in a hawkish direction; any downside relative to consensus, however, will likely see markets continue to price the path of future rates more dovishly than the Fed's current dot plot.
The Cleveland Fed (NOWCAST) currently sees inflation for September 2023 coming in at 0.39% for the month for headline CPI and 0.36% for core CPI once food and energy are stripped out. That translates to a 3.7% annual rate for headline CPI and 4.2% for core CPI. If this nowcast holds, it will continue the recent trend of headline inflation accelerating as core inflation cools.
The Fed tends to focus more on core CPI indicative of longer-term inflation trends. Here, a decline would be welcome, but the Fed is still concerned that with inflation around 4%, there is still some way to go to meet its 2% annual goal. Also, remember that nowcasts have tended to overstate inflation in recent months.
Shelter costs will be one of the most significant numbers in Thursday’s CPI report. Shelter makes up a large portion of most households’ expenditures, and so it carries a high weight in the CPI series. Recently, shelter costs have seen disinflation, and if that trend continues, it may help move core CPI lower.
The Fed is watching incoming economic data closely and may raise interest rates one more time in 2023 if it doesn’t see inflation continue to cool.
The Feds Summary of Economic Projections showed a broadly even split between raising rates and holding them steady over the remainder of 2023. Fixed income markets, as assessed by the CME Futures market, are more dovish, believing the chance of a November or December interest rate hike is somewhat fading.
The current assessment is that there’s currently a 1 in 4 chance of a hike coming in later this year, according to the implicit forecast of fixed-income markets. The upcoming CPI report will be informative. Headline inflation may increase based on energy costs, but the Fed will watch core CPI closely for further evidence of inflation moving back to its 2% goal.
At its September meeting, the Fed voted unanimously to keep interest rates steady at 5.25-5.50%, in line with expectations. The central bank upgraded its language about the economy, stating it's growing at a "solid" pace instead of "moderate." It also recognized that job gains have slowed recently but are still strong. Policymakers believe that inflation is high and the unemployment rate is low. In its updated economic forecasts, it raised expectations for real GDP growth in 2023 and 2024 and lowered its unemployment rate projections. Inflation is expected to be 3.3% in 2023, 2.5% in 2024, and 2.2% in 2025 for headline PCE. Core inflation is projected at 2.6% in 2023, 2.6% in 2024, and 2.3% in 2025. The "dots" were revised hawkishly, and the central bank still sees a further rate hike this year, while for next year, it now only sees the prospect of 50bps rate cuts (vs. 100bps in its previous SEP).
Become a member today and read the entire newsletter
Click here to read the complete newsletter
Have a friend? Share the Weekly Wizdom Newsletter and win exciting perks and rewards!