Economists are predicting that inflation in the United States likely ticked down in September, following a slowdown in gasoline price growth and a decrease in used car costs. However, there are indications that certain categories closely monitored by the Federal Reserve, such as housing and other services, may still exhibit persistent strength.
According to consensus expectations from FactSet, the consumer price index is expected to have risen at an annual pace of 3.6% in September, slightly lower than the 3.7% pace recorded in August. This would be the first month since June that headline price growth has slowed. On a month-over-month basis, economists anticipate a 0.3% increase in headline inflation for September, down from a 0.6% rise in the previous month.
On the other hand, core CPI, which excludes the volatile food and energy indexes and provides a better measure of underlying price growth, is expected to have remained relatively steady in September. Economists forecast a 0.3% increase in core inflation, matching August’s figure. Additionally, they predict that core inflation will slow to an annual pace of 4.1%, compared to the previous rate of 4.3%. If this occurs, it would mark the slowest pace of core inflation in two years.
At first glance, a September inflation report that aligns with expectations may seem like positive news for the Federal Reserve, as both core and headline inflation would be decelerating compared to the previous month. However, a closer look at the underlying details reveals a potentially mixed picture. There is a risk that a cooling headline inflation number might conceal worrisome heat beneath the surface.
“As with most macro data reports these days, nuance is going to matter,” wrote Andrew Patterson, senior economist with Vanguard.
Unfortunately, it appears that the housing sector will not offer much relief in September. Bank of America economists predict that rent prices will increase from 0.4% to 0.5%, while the owners’ equivalent measure will hold steady at a robust 0.4% for the month.
Core services, excluding housing, are also expected to remain strong, an aspect that the central bank has been particularly attentive to in recent months. Citi economists anticipate a 0.5% climb in core services during September, suggesting that the U.S. economy is “exiting the inflation soft-patch.”
“The reading should serve as a reminder to markets and Fed officials that too-high inflation has not been vanquished,” wrote Citi economists Veronica Clark and Andrew Hollenhorst.
Inflation Risks and the Fed’s Dilemma
Economists are expressing concerns about the possibility of higher price growth for September, which could exceed forecasts. This is particularly worrisome if airfares decelerate less than anticipated or hotel prices fail to decline as expected.
The path forward for inflation declines is also becoming more challenging after September. Used car prices may have reached the end of their decline, while other goods prices are remaining relatively stable.
Furthermore, health insurance costs are expected to rise in October due to a recalibration in sector prices. This adjustment will eliminate the artificial suppression of health insurance inflation caused by anomalies during the Covid-19 era.
Given these developments, the Federal Reserve will closely analyze the details of the inflation report to determine whether to raise interest rates at the remaining two policy meetings this year.
The minutes of the Fed’s September 19-20 meeting revealed that a majority of bank officials still believe that an additional quarter-point increase in the federal funds rate would be appropriate. The September jobs report, which exceeded economists’ expectations by revealing the creation of 336,000 jobs, also suggests that the economy can withstand further tightening measures.
However, the recent increase in bond yields has altered the outlook to some extent. Several Fed officials have acknowledged that bond market developments are already tightening financial conditions, possibly reducing the need for another rate hike.
In light of these developments, if the inflation figure aligns with or falls below expectations, it could convince the Fed to maintain steady rates when officials convene on October 31 to November 1.