US CPI figure keep a further rate hike this year on the table

Today’s US CPI figures were broadly in line with expectations, the most significant exception being the monthly core figure which showed a 0.3% gain against expectations of an unchanged 0.2% increase. This will likely be a disappointment for the Fed but is probably not enough in itself to justify another rate hike being delivered at this month’s meeting. But it does reinforce the case set out by Powell at the Jackson Hole Symposium for keeping a further hike on the table in case it is needed before year end.

The headline rate posted a second consecutive monthly increase, driven largely by gasoline prices posting a 10.6% rise, with energy sensitive components also showing gains, such as airline fares. Food prices also rose by 0.2%. Although these increases were largely expected, the jump in the annual headline rate from 3.2% to 3.7% will still likely be disappointing to the Fed, particularly given that the 0.6% increase on the month was the biggest monthly increase since June last year. However, going forward these pressures should reverse over the next couple of months or so, with the headline rate still largely expected to fall below 3% by end Q1.

But it is the core rate that will be most worrying to the Fed, as it suggests a stubbornness in underlying inflationary pressures. Although the annual core rate fell from 4.7% to 4.3%, much of this fall is accounted for by favourable base effects, with further such favourable adjustments expected for the September reading too which could see the annual rate dip below 4% for the first time since May 2021. Although the monthly reading of 0.3% was boosted by rounding measures (the actual reading was 0.27%), the fact that it rose at all will be of concern to the ‘hawks’ on the FOMC.

On balance, there is probably not enough in these numbers alone to justify a further rate hike this month. But even if sufficient to prevent the ‘hawks’ on the FOMC from calling for another rate hike next week, the overall inflationary picture being painted is still too strong to suggest that we will see any relaxation in policy soon. As things stand today, another 25bps interest rate hike before year-end is still very much on the cards.