US CPI Commentary (September 2022)

Updated September 13, 2022

The hugely anticipated US inflation data is released tomorrow, in what is now arguably the key risk event on the calendar. The excitement is probably magnified by the fact that it is also the last major US economic release ahead of the next FOMC meeting on September 21. Markets have moved to nail on another jumbo-sized 75bp rate hike, on the back of a chorus of recent hawkish Fedspeak and several “goldilocks” jobs and services sector reports.

Economists forecast a first decline in the monthly headline figure since May 2020, after remaining flat in July. This will push down the annual number to 8.1% from the 8.5% print in July. The plunge in gasoline prices from above $5 per gallon to below $4 is the chief reason for the welcome decline, and early September prices are still falling, implying a softer print for this month too. Goods prices have clearly eased as well, with for example used car prices, noticeably falling.

Perhaps the truer read for price pressures going forward and the risks which lie ahead will be seen in the core measures which are likely to prove elevated and sticky. Shelter and housing costs are hugely impactful here as they are a large contributor to the services component of the index and are slow to respond to changes. They are seen growing near to 6% on an annual basis, though there is hope that the pace of rent increases may now have peaked.

Fed policy is clearly targeting inflation, especially as concerns over an imminent recession have faded due to solid employment trends and crude prices which have pulled back. Traders will focus on the terminal rate for the Fed funds rate which moved above 4% for the first time in this cycle at the end of last week.

US inflation for August came in hotter than expected, a severe jolt to markets that had been forecasting another leg lower in the headline prints. The dollar has gone bid as Treasury yields surge, keeping the pressure on the Fed for a jumbo-sized rate rise at its meeting next week. Money markets have fully priced in a 75-basis point Fed rate hike, with the terminal rate moving towards 4.15%.

The benchmark consumer price index increased 0.1% for the month and 8.3% over the past year. Excluding volatile food and energy costs, CPI jumped 0.6% from July and 6.3% from the same month a year ago. Economists had been expecting headline inflation to fall 0.1% and core to increase 0.3%. The year-on-year estimates were for 8.1% and 6.1% gains.

Last month’s optimism around seeing a peak in inflation has evaporated as the underlying rate of prices, best proxied by core inflation, remain elevated and sticky. While broad increases were mostly offset by the double-digit decline in the gasoline index, food costs continued to rise. Indeed, groceries have risen 11.4% over the past year.

The report highlights how long it will take for prices to come down to the Fed’s 2% target, even as policymakers at the Fed emphasise their inflation-fighting credentials. It also begs the question about if the world’s most powerful central bank can really cut rates next year with such hot inflation.

Written by Jamie Dutta, Market Analyst for Vantage

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