Economists say the monthly report on the US Consumer Price Index (CPI), which will be released later Thursday, will blur the outlook for Federal Reserve officials when deciding whether to raise interest rates again, especially as the escalation of the Israeli-Palestinian conflict increases uncertainty. CPI data may indicate that overall inflation in the United States slowed down in September. However, Bloomberg economists Anna Wong and Stuart Paul wrote in their outlook released on Wednesday that due to the surge in second-hand car prices, the year-on-year increase in core inflation (excluding food and energy categories) may climb further to between 3% and 4% in the future.
Economists predict that the year-on-year increase in US CPI in September will decrease from 3.7% to 3.6%; The year-on-year increase in core CPI in September will decrease from 4.3% to 4.1%. The commodity inflation driven by second-hand car prices will be the biggest driver of the core CPI increase, reversing the negative growth trend in the past three months. In some core service categories, such as car insurance, doctors, and hospital services, inflation is expected to remain high.
Wong and Paul stated:" If the risks between inflation and economic growth have become more balanced in the past few months, then the conflict between Israel and Hamas has now shifted the balance back towards inflationary upward risks. Our preset benchmark scenario is that the Federal Reserve will maintain interest rate stability for the rest of this year, but we believe that the risk of further rate hikes cannot be ignored, and the market may have underestimated this
After the Federal Reserve raised its benchmark interest rate target range to 5.25% -5.5% in July, the slowdown in core inflation this summer has sparked hopes that the Fed's rate hike has come to an end. But high gasoline prices drove the CPI up 0.6% month on month in August, the largest increase since the inflation rate reached a 40 year high in June 2022, and the core CPI also saw its first month on month increase since May.
High risk of core CPI warming
The rapid decline in inflation in the United States over the past few months may be too positive to sustain. Categories such as second-hand cars and air tickets, which have played a significant role in recent inflation cooling, have re emerged with new upward risks, raising the question of whether price pressure in the service industry can slow down enough to sustain a downward trend in the coming months?
Bruce Kasman, Chief Economist of JPMorgan Chase, said that as used car prices, airline ticket prices, and healthcare insurance costs stop falling, it is expected that the "core" CPI growth excluding food and energy will rebound to around 3.5% year-on-year in the next six months. Kasman said, "Do you think you can reduce the core inflation rate by one percentage point - around 2.5% - based on the increase in the aforementioned items? I don't think so
However, there will be some good news regarding rent. Economists estimate that the inflation rate of major residential rents has decreased from 0.5% to 0.4%, while the inflation rate of equivalent rent for homeowners has remained stable at 0.4%.
Despite the decline in second-hand car prices over the past year, the ongoing shortage and the risk of production disruptions caused by the UAW strike may trigger new price pressures in the coming months. And even without considering strikes, I believe a more structural and fundamental issue is that we still have a very, very lack of used cars. Whenever and for any reason, as long as demand increases, demand for used cars will soar, and inventory will not show any substantial improvement until 2025, "said Omar Sharif, founder of Inflation Insights LLC
Secondly, although airfare prices have decreased in 11 of the past 15 months - they may not actively drive inflation in the coming months, they may not become a reliable factor in driving down inflation. This category itself is quite unstable, partly due to its close correlation with fuel costs. Lindsey Piegza, Chief Economist of Stifel Financial Corp., said, "It is worrisome that we have now seen energy price increases driving overall prices for a considerable period of time, ultimately leading to a reversal of core prices, or at least upward pressure on core prices
A significant uncertainty factor is whether the war between Israel and Hamas will spread and affect the oil supply in the region. At present, the recent surge in oil prices has weakened, but more importantly, production capacity has returned to normal. The demand is quite stable; The capacity of global airlines has finally returned to pre pandemic levels.
Wong and Paul warn that the increasingly tense situation in the Middle East may have a negative impact on supply, pushing up energy prices. Economists provide examples that if the oil price reaches $100 per barrel, the overall CPI inflation rate may reach 4% again by the end of this year. Wong and Paul wrote, "As long as inflation expectations remain stable, the Federal Reserve may not be concerned about price increases. However, sustained and larger oil supply shocks may increase the risk of inflation expectations spiraling out of control, ultimately prompting the Federal Reserve to continue raising interest rates