US inflation data is coming this Tuesday with a broad measure of consumer prices likely to cool off even as a gauge of underlying pressures intensifies, US inflation data in the upcoming week may provide conflicting signals to the Federal Reserve ahead of a probable third consecutive big interest-rate hike.
The government’s report is expected to show an 8% increase in the overall consumer price index from the same month last year, down from 8.5% in July yet still historically elevated. Stripping out energy and food, the CPI is forecast to climb 6.1%, up from 5.9% in the year through July.
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A drop in gasoline prices helped soften July inflation and gas prices have since continued to move lower. The average US price of gas was $3.78 a gallon as of Friday, according to motor club AAA, down from $4.03 a month ago.
Now it would take much weaker than expected August inflation data to revive talk of a smaller increase of 50 basis points, however, in recent speeches, US central bankers stressed that high inflation will indeed require higher borrowing costs that slow demand, though they kept the door open on the size of a hike at the conclusion of their Sept. 20-21 meeting.
“We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard said at a conference on Wednesday. “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”
Fed Governor Chris Waller signaled his backing Friday for a 75 basis point hike by saying he supported “another significant increase.” Earlier, St. Louis Fed President James Bullard said that he is leaning “more strongly toward” a jumbo move when officials gather Sept. 20-21. Both have been good bellwethers so far this year on where Fed policy is headed. “While I welcome promising news about inflation, I don’t yet see convincing evidence that it is moving meaningfully and persistently down along a trajectory to reach our 2% target,” Waller said. “Until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy.” He also suggested that after this month’s meeting, the Fed will shift more toward data dependency, while spelling out that this meant he could not predict how high or quickly rates would have to rise.
Earlier, St. Louis Fed President James Bullard told Bloomberg in an interview that he leans toward a third consecutive 75-basis-point move in September. Kansas City Fed chief Esther George separately said there was a “clear cut” case to continue to act, though she argued that officials should prioritize steadiness over speed.
Economists trimmed their US inflation forecasts through the end of next year, likely an encouraging sign for the Federal Reserve as it tries to keep price expectations anchored. Projections for the year-over-year personal consumption expenditures price index, the Fed’s preferred inflation gauge, was lowered by 0.1-0.2 percentage point for each quarter. By the first quarter of 2024, it’s expected to average 2.4%, inching closer to the central bank’s 2% target.
The fed funds rate at 2.33% is “well, well below what you would consider being neutral in this current inflation environment,” former New York Fed President Bill Dudley said in an interview on Bloomberg Television on Friday. Policymakers have “made it very clear” that they need to get inflation back to 2%, “so they’re going to be tighter for longer than I think people expect,” he said. The Fed raised its target range for interest rates to 2.25% to 2.5% in July. Dudley expects rates will be “4% or higher” in the first half of 2023.
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"Although we move to a 75bp rate hike in September, we acknowledge there are risks to a smaller 50bp hike," BofA said in a note published Thursday. In one risk, "next week's Consumer Price Index report may surprise to the downside, opening the door to a smaller hike," it said.
Goldman Sachs and Barclays also raised their rate-hike forecasts to 75 basis points for September and 50 basis points for November. Barclays said it now only sees an "outside chance" that softer-than-expected August inflation figures will swing the pendulum back toward an increase of 50 basis points at the September FOMC meeting.
The probability of a September hike of 75 basis points climbed to 86% on Friday from 57% a week earlier, according to the CME Fed Watch tool.
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