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Headline October CPI figures broadly matched market expectations, which should keep the FOMC non-committal on rate cuts.
Overall CPI rose from 2.4% YoY in September, to 2.6% last month, while core inflation stabilised at 3.3% YoY. With these figures in line with economist consensus on a rounded basis, market reaction has naturally been muted. This now leaves market emphasis on the FOMC’s interpretation of the latest set of readings. We are still inclined to think the data offers cover for Fed speakers to equivocate on further rate cuts, ostensibly due to a lack of disinflation progress, but with upside inflation risks from a Trump presidency looming large in the background.
As such, our view remains that the Fed will most likely pause in December, before cutting once more in Q1, albeit with some outstanding risk that the FOMC has already delivered their last rate cut of this cycle.
Admittedly, some in markets will be focused on the unrounded inflation figures, and these did surprise marginally to the downside. Specifically, core price growth eased slightly from 0.31% MoM in September, to 0.28% in October. Economists had been looking for a 0.30% print in this latest round of figures. Even so, we think this misses the point. Core inflation remains too hot for comfort, with few signs of disinflation progress, and headline inflation now moving away from target. While this would have been much less concerning were fiscal policy to remain unchanged, the prospect of increased spending under a Trump presidency means growing upside risks to the inflation outlook.
Indeed, we think this point is clear in the details of today’s report too. The Fed’s preferred supercore measure of inflation has rebounded, and now stands at 4.28% on a 3mma annualised basis, up from 3.82% in September, suggesting price growth momentum continues to rise. Looking at single-month changes, it is notable that shelter inflation rose in October, reversing much of last month’s slowdown. Having slipped to 0.22% in September, this most recent set of figures saw shelter prices rise by 0.38% MoM, with a faster pace of price increases seen across both primary rents, and owner’s equivalent of rent. That said, arguably the biggest surprise this month came from core goods prices, which failed to accelerate as expected, despite a large rise in used car prices. With this undershoot largely attributable to volatile components, it should mean upside risks for core price growth in the pipeline looking forward.
Taken as a whole, we are inclined to think that today’s data changes little regarding the Fed’s view on the economy right now.
In short, that means policy is tight, but disinflation progress has temporarily stalled. Such a perspective could have allowed for rate cuts, anticipating that future price growth would slow. But this argument no longer holds water when considering the upside inflation risks stemming from the incoming administration. This, in our view, underpinned Chair Powell’s tone last week, which we saw as shifting toward a more non-committal stance on policy easing. We will be keeping a close eye on Fed speakers in the coming days, but we expect to hear further equivocation based on our read of today’s numbers, which should support further paring back of rate cut bets, and another round of dollar upside.
Author:
Nick Rees, Senior FX Market Analyst