U.S. inflation likely continued its long downward arc in October, with further declines forecast for the months ahead, but stick core consumer price prices are likely to keep investors from fully discounting a final Federal Reserve rate hike amid resilient economic growth and a hot jobs market.
The Commerce Department is likely to report that headline inflation slowed notably, to 3.3% in October from 3.7% in September, paced by a pullback in oil and energy prices and muted autumn wage gains.
Core consumer prices, however, are likely to remain largely unchanged when compared to September levels, with a year-on-year gain of 4.1% and a monthly advance of 0.3%.
Upside risks to both readings, however, are finding their way into Wall Street forecasts as economists see noisy data in healthcare costs, hotels and new vehicles prices, possibly as a result of supply shortages linked to the weeks-long industrial action from the United Autoworkers’ Union.
The core inflation reading, which is closely-tracked by the Fed, will likely challenge or define its recent messaging, which calls for at least one more rate hike over the coming months as policymakers warn that broader financial conditions are not yet restrictive enough to bring inflation back to the central bank’s preferred 2% target.
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Fed Chairman Jerome Powell told an IMF-hosted event last week, adding that he and his colleagues will balance “both the risk of being misled by a few good months of data, and the risk of overtightening.”
Treasury yields moved firmly higher in the wake of his comments, but are now trading at similar levels heading into today’s reading, with benchmark 10-year notes pegged at 4.614% and 2-year paper changing hands at 5.031%.
The CME Group’s FedWatch tool, meanwhile, indicates no better than 25% chance of a rate hike over the next five meetings, with the odds of a rate cut in June pegged at around 41%.
Data from Bank of America closely-tracked Fund Mangers’ Survey, published Tuesday, also suggests that around 76% of those polled have called the end of the Fed’s rate-hiking cycle, while nearly two-thirds see lower Treasury yields in the months ahead.
Consumers are also seeing light at the end of the inflation tunnel, at least based on data published Tuesday by the New York Fed that showed year-ahead inflation prospects fell to 3.57%, the lowest in three months, with the five-year forecast easting to 2.7%.
“Our underlying inflation optimism is undimmed,
because all the pipeline drivers of inflation we follow are
headed in the right direction, and many have fully reversed
their pandemic surges,” said Ian Shepherdson of Pantheon Macroeconomics.
“But if the core is 0.4% today, Treasury yields
will rise, the market-implied chance of a December rate
hike will increase, perhaps sharply, and stocks probably
will sell off,” he added. “We’re sticking to our view that the Fed won’t
hike next month, but we have always thought the risk is
not negligible.”
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