Wednesday’s report is a direct read on how far the Iran war’s energy shock is feeding into US consumer prices, and a hot energy component would reinforce the link between crude risk and Fed policy. Treasury markets are likely to trade the core number rather than the headline: a soft core would favour the front end and weigh on the dollar, while a firm one would revive October hike pricing that faded after weak payrolls. Gold would likely benefit from a soft core and lower yields. With Brent still above $100 and fresh attacks on Saudi infrastructure, energy-driven inflation risk extends well beyond this release.
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September’s CPI is set to look alarming on the surface and calm underneath, and the Fed has to decide which one to believe.
Summary:
- US September CPI is due Wednesday at 12:30 GMT (8:30 ET), the last inflation report before the Fed’s October 27-28 meeting
- The market expects headline CPI to rise 0.6% on the month, lifting the annual rate to around 3.7% from 3.4%
- Core inflation is forecast to slow to around 0.2% on the month, holding at 2.4% annually
- Energy is expected to jump around 5.5%, led by gasoline, while food stays subdued
- Odds of an October Fed hike have fallen to around one in four after weak September payrolls, with December still largely priced
- Fed Chair Warsh speaks in Bangkok early Friday, his final scheduled remarks before the meeting
US consumer prices are expected to post their sharpest monthly rise since April when September inflation data is released on Wednesday, driven almost entirely by energy, while underlying inflation is forecast to stay subdued.
The market expects headline CPI to climb 0.6% in September, according to Westpac’s calendar, up from 0.4% in August. That would lift the annual rate to around 3.7% from 3.4%, a four-month high. The Cleveland Fed’s inflation nowcast points in the same direction, at about 0.5% for the month and 3.6% on the year. The report is due at 12:30 GMT (8:30 ET).
Energy is the main driver. Analysts expect energy prices to rise around 5.5% in the month, led by gasoline, which would be the largest energy contribution since March. In August, gasoline prices were already up more than 27% on a year earlier.
Core inflation, which excludes food and energy, is expected to tell a calmer story. Forecasts point to a rise of around 0.2%, slower than August’s 0.3%, keeping the annual core rate at 2.4%. August’s core reading was boosted by a one-off jump in telephone services following a methodology change, and analysts expect volatile items such as hotel prices and used cars to correct. Airfares are the exception, rising as higher jet fuel costs pass through to ticket prices.
That split puts the Federal Reserve in an awkward position. The Fed raised its target range to 3.75%-4.00% on September 16, but the odds of a follow-up move at the October 27-28 meeting fell to around one in four after September payrolls showed only 29,000 jobs added. Markets still largely price a December hike. Goldman Sachs had expected one more increase in October, though that view assumed oil would fall towards $85, and Brent remains above $100.
A firm core reading alongside the energy-driven headline would likely revive October hike bets, while a soft core would reinforce expectations of a December move. Thursday’s producer prices and retail sales will add to the picture before Fed Chair Kevin Warsh speaks at the IMF meetings in Bangkok early Friday, his last scheduled appearance before the meeting.
This article was written by Eamonn Sheridan at investinglive.com.