CPI data is about to be released! Be sure to pay attention to these "details"
The Fed's concerns about inflation have eased, and on Thursday it will release the CPI data for September, with a year-on-year growth rate expected to be 2.2% and a month-on-month growth rate of 0.1%. The core inflation rate is expected to be 3.2% and 0.2%. Housing inflation remains stubborn, and rising prices of used cars and discretionary goods may impact inflation. Wage growth brings upside risks, especially in the healthcare sector. The President of the Dallas Fed warns that loose financial conditions may boost demand, and inflation risks still need attention
Recently, Federal Reserve policymakers have eased concerns about inflation, and their confidence in getting closer to the inflation target will face a key test on Thursday.
Later on Thursday, the U.S. Department of Labor will release the highly anticipated CPI data for September, which is expected to show further progress towards the Fed's 2% inflation target.
The market expects that the year-on-year inflation rate for September CPI will be 2.2%, with a month-on-month increase of only 0.1%. However, the core inflation rates are expected to be 3.2% and 0.2% respectively, still far from the 2% level that policymakers hope to see. This gap may affect the speed of the Fed's actions in the new easing cycle.
Officials cut the benchmark federal funds rate by 50 basis points at the September meeting. However, after the September jobs report exceeded expectations, Fed officials have recently indicated that the pace of future rate cuts may be more cautious.
It is worth noting that some details in Thursday's report are important: housing inflation has been stubborn, although policymakers still expect the decline in renewal rents to show up in the data in the coming months.
Furthermore, if used car prices and prices of other discretionary goods suddenly rise, it may make the Fed concerned about whether sustained strong consumer demand will keep inflation high.
Some economists point out that another upside risk to inflation comes from wages, which are the main engine behind consumer spending. Real incomes for Americans in August saw the largest annual increase in a year. There may be greater pressure in the future after nearly 50,000 dockworkers negotiated significant pay raises and 33,000 Boeing workers are currently in strike negotiations for an agreement.
Citigroup economists Veronica Clark and Andrew Hollenhorst wrote in a report on Tuesday, "Continued strength in wages will clearly bring upside risks to inflation, especially in sectors like healthcare services."
Dallas Fed President Logan warned in a speech on Wednesday that "further unwarranted easing of financial conditions could boost spending and increase total demand," which means that lower mortgage rates, rising stock prices, and loose credit conditions could trigger another surge in inflation.
While Logan stated that she still believes inflation will continue to fall back to the Fed's target level, she noted that upside risks to inflation mean the Fed "should not rush to cut rates significantly" but should "proceed gradually while monitoring the behavior of financial conditions, consumption, wages, and prices."