On Tuesday local time, the United States will release October Consumer Price Index (CPI) data.
There is still one month until the next meeting of the Federal Reserve, and after Fed Chairman Powell's latest statement, the direction of the anti inflation trend may become an important reference for whether to continue raising interest rates within the year. Institutional forecasts indicate that a fall in energy prices will bring overall inflation back into a downward trajectory, but the cooling of core inflation will slow down. The financial situation has tightened due to recent fluctuations in US bond yields, and signs of economic slowdown have emerged. It is not easy for the Federal Reserve to find a balance between stabilizing prices and a soft landing.
Core inflation remains anxious
Driven by energy prices, overall inflation in the United States has been rising slightly in the past three months.
As the fourth quarter begins, international oil prices are constrained by concerns of supply and demand balance, and price pressures will once again fall. The institution predicts that the overall inflation CPI will fall from 3.7% to 3.3% last month, dropping to 0.1% month on month, setting a recent low.
According to the Energy Information Administration (EIA), gas station prices in the United States have fallen 12% from their high set in September this year last week, and are currently at their lowest level since March, also a new low in the same period in nearly three years. After the summer consumer boom, energy consumption in the United States is gradually cooling down. Craig Erlam, a senior market analyst at Oanda, said in an interview with First Financial reporters that as the situation in the Middle East has not worsened further, market attention has shifted to the demand side. In response to price pressures, there are signs that major central banks, including the Federal Reserve and the European Central Bank, may keep interest rates high for a longer period of time, which is putting pressure on the economy.
The latest PMI survey shows that commercial activity has cooled down in all directions again after a brief recovery from summer, which has raised concerns about a decline in demand. Erram analysis suggests that considering the PMI in October indicating a decline in order indicators, the risk of commodity prices may tilt downwards as demand cools. If pessimism continues to suppress oil prices, overall inflation may continue to slow down by the end of the year.
However, as an inflation indicator that the Federal Reserve is more concerned about, the core CPI growth rate of 4.1%, which does not take into account energy and food, remains unchanged. This may raise market concerns, as the Federal Reserve still needs to weigh whether to raise interest rates again.
The cost of housing in the United States accounted for more than half of the CPI increase in September. Owner Equivalent Rent (OER) surged by 0.6%, the largest increase since February. Although more apartments are available for sale, rent is still rising. Rent in October may continue to drive up prices, with Realtor.com reporting strong demand for rental properties, especially for low-priced apartments. The median rent of the 50 largest cities is $1747, which is still significantly higher than the pre pandemic level,
The price of second-hand cars is expected to turn up slightly. A reporter from First Financial News noticed that the wholesale price of Manheim's second-hand cars has dropped by 2.5% compared to September. As consumer demand has weakened, the UAW strike action has not caused wholesale prices to rise.
Hotel and leisure and entertainment expenses are expected to maintain growth. As American household consumption shifts from goods to services, the expansion of the service industry has become a key factor supporting the resilience of the US economy. The vitality of the labor market ensures demand. According to data from the US Department of Labor, job vacancies in the United States rebounded again in September. From the number of applicants for unemployment benefits, it seems that companies have only chosen to reduce recruitment quotas, rather than adopting layoffs to address changes in labor demand.
It should be noted that the University of Michigan consumption survey released last week showed that consumer expectations for inflation in the next year have risen for the second consecutive month to a seven month high of 4.4%. Erram told First Financial that due to strong job demand, inflation in the service industry is still at a high level. "The Federal Reserve hopes that as the economy slows down and the job market softens, the balance between labor supply and demand will help suppress wage growth, thereby easing the cost pressure on the entire service industry. If it continues to exceed the 2% target, the Fed's tolerance will be put to the test
The Federal Reserve may continue policy pressure
From the latest statements of Federal Reserve officials, it can be seen that the signal of opening the door to further interest rate hikes has been strengthened.
During his attendance at the International Monetary Fund (IMF) seminar last week, Powell expressed "satisfaction" with the progress made so far in reducing inflation in the United States, but did not yet believe that interest rates were high enough to lower inflation to the target of 2% for a period of time, and that some illusions of inflation needed to be prevented. Looking ahead, a greater share of the progress made in reducing inflation may come from policies suppressing the growth of total demand, "he said.
The recent signs of a slowdown in the US economy have attracted attention, and the expansion of PMI in the service industry is approaching a critical point. The Atlanta Fed's GDPNow model estimates that the annualized economic growth rate in the fourth quarter was 2.1%, far below the 4.9% growth rate in the third quarter. However, within the Federal Reserve, it is believed that the goal of reducing inflation from 3% to 2% may face greater challenges. The latest SEP shows that the timeline has been postponed to 2026. Several Federal Reserve officials have recently stated that the fight against inflation is far from over.
Erram told First Financial that a soft landing is the best scenario, as inflation gradually decreases as the economy slows down. However, the biggest risk is that it will evolve into stagflation, which means that while the economy slows down, prices remain high, which will put the next step in a dilemma, "he analyzed.
It is worth mentioning that the market does not believe that the Federal Reserve will raise interest rates again. According to data from federal funds interest rate futures, the probability of a 25 basis point rate hike in January next year is only 20%, and by the end of next year, interest rates are expected to fall by about 80 basis points, equivalent to three rate cuts.
Wells Fargo macro strategist Angelo Manolatos believes that the Federal Reserve has reached the "last mile" of fighting inflation. They are still struggling with higher than target prices, with the advantage that economic growth has exceeded potential growth. Against this backdrop, Powell made a stronger comment warning the market not to get complacent. In fact, the Federal Reserve can basically confirm the end of the interest rate hike cycle, "he said.
Erram stated that attention needs to be paid to the impact of the risks of future consumer spending on the US economy. Student loan repayments resumed in October, and many American households may cut back on expenses. Although the excess savings accumulated during the epidemic period are still sufficient, they are mainly concentrated in high-income households, and consumption habits will become more differentiated as a result. He believes that if the monthly retail sales rate announced this week falls short of expectations, as long as inflation risks are manageable, the Federal Reserve will maintain a wait-and-see attitude. It's not yet time to end the battle. The committee is closely monitoring policy risks in both directions. As the pressure of economic slowdown becomes apparent, excessive policy efforts need to be prevented even more