The monthly report on consumer prices US scheduled for release on Thursday could complicate the Federal Reserve’s decision on whether to raise interest rates. Economists expect the Core inflation may increase.
The complexity in consumer prices US is exacerbated by heightened uncertainty from the escalating conflict in the Middle East, as reported by Bloomberg Economics.
Federal Reserve officials must carefully assess these factors when making interest rate decisions.
The CPI will likely indicate that headline inflation moderated US consumer prices in September.
Core Inflation, Used-car prices, and evolving economic dynamics
However, core inflation, excluding food and energy categories, is expected to have increased to a range of 3% to 4% annually.
This increase is attributed to a surge in used-car prices, as highlighted by Bloomberg economists Anna Wong and Stuart Paul in their Wednesday preview of the release.
According to Wong and Paul, inflation and economic growth dynamics have shifted in recent months.
While they had become more balanced, the Israel-Hamas conflict has introduced fresh uncertainty regarding core inflation, particularly the risk of increased inflation.
This development coincides with the easing of supply bottlenecks resulting from the pandemic.
Consumer prices US: Influencing factors and Economic Outlook
Their primary scenario anticipates that the Federal Reserve will maintain the current interest rates throughout the remainder of the year.
However, they highlight significant, though not negligible, factors indicating the possibility of another rate hike, which the market may not be fully accounted for in its pricing.
This perspective underscores the nuanced and evolving nature of economic forces influencing monetary policy decisions.
Although core inflation had shown signs of slowing during the summer, it had generated optimism that the Federal Reserve might halt its rate increases.
This sentiment followed the Fed’s decision to raise the target range for its benchmark in July, setting it between 5.25% and 5.5%.
However, the significant increase in gasoline prices in August, marking a 0.6% rise from the previous month, disrupted this trend.
This uptick in consumer prices US, marked the first acceleration since May. On a monthly basis, the core CPI hiked in the wake of inflation hitting a four-decade high in June 2022.
Economists expectations
1. Bloomberg economists anticipate a slight dip in year-over-year CPI inflation from 3.7% to 3.6%. At the same time, annual core inflation is expected to decrease from 4.3% to 4.1%.
2. The primary driver of core CPI’s ascent will be goods inflation, primarily influenced by rising used-car prices. This marks a reversal from the preceding three months when negative readings were observed.
3. While specific core service categories, like car insurance and physician and hospital services, are expected to exhibit persistent inflation, there may be some encouraging news regarding rents.
4. Regarding residential rents, Bloomberg Economics forecasts that the inflation in primary residential rents will moderate slightly from 0.5% to 0.4%. In comparison, owner-equivalent rent inflation is expected to remain steady at 0.4%.
Geopolitical events and inflation dynamics
However, Wong and Paul cautioned that escalating tensions in the Middle East could trigger supply disruptions and lead to higher energy prices.
They noted that if oil prices surged to $100 per barrel, it could result in higher US consumer prices.
If that would be the case, then headline CPI inflation will reach 4% by the year’s end.
Amid ongoing discussions about the Federal Reserve’s monetary policy decisions, consumer prices US have become a critical factor influencing interest rates.
These considerations underscore the potential impact of geopolitical events on inflation dynamics.
While inflation expectations remain firmly anchored, the Fed is expected to tolerate these price increases, as noted by Wong and Paul.
However, if a prolonged and substantial oil shock were to occur, there’s a heightened risk that inflation expectations could become unmoored, potentially compelling the Fed to persist in raising interest rates.
This emphasizes the delicate balance the Fed must maintain in its monetary policy decisions in the face of various economic factors.
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