Is The Fed’s Fight Against Inflation About To Take A Turn For The Worst?

All eyes are fixed on today’s August release of the US Consumer Price Index. Markets are expecting CPI prints in the next months to consolidate the return of inflation closer to the Federal Reserve's objective of 2%.


The CPI report out later today will provide the most recent indication of how far the Fed may need to go to get inflation back to its target. According to experts, monthly inflation is predicted to rise to 0.6% in August thanks to rising energy costs, while core inflation is expected to remain constant at 0.2%. Year-over-year, inflation is anticipated to grow to 3.60%, but core inflation is expected to fall by 4.3%.



US CPI data October 2022 - Jul 2023


Figure 1: US CPI Data, Source: U.S. Bureau of Labor Statistics



If markets witness more sticky inflation higher than the 0.6% forecasted by experts, the bond market could start pricing in another rate hike before the end of the year, and possibly as early as November.


Markets are currently pricing in a 7% probability of a 25-basis point hike next week, with this jumping to 46% by November, according to Fed funds futures.


The recent substantial spike in the price of oil and several food products threatens to erode what has been a very beneficial and robust disinflationary drive from the goods sector up to this point. When this is combined with base effects becoming a headwind, the economy may see an increase in the frequently reported annual headline inflation statistic in the following months.


Although reported inflation has been improving for months, Federal Reserve authorities, including Governor Christopher Waller, are rightly concerned that the data could see a shift in direction.


Waller summarized the situation in an interview with CNBC as follows: “We’ve been burned twice before. In 2021, we saw it coming down and then it shot up. At the end of 2022, we saw it coming down, and that all got revised away. So, I want to be very careful about saying we’ve kind of done the job in inflation until we see a couple of months continuing along this trajectory before I say we’re done doing anything.”


If the inflation figures come in below market expectations, it could strengthen the case that the Fed will end its rate hike cycle in 2023, potentially depressing the US dollar. A sticky inflation print, on the other hand, might provide additional support to dollar bulls, as expectations of additional Fed rate hikes will likely gain more traction.





The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.