Soft Core Inflation to Bolster Case Against More Fed Tightening

A monthly report on US consumer prices due Wednesday is set to show a third month of subdued core inflation, adding to the case against more Federal Reserve interest-rate increases, according to Bloomberg Economics.

Author of the article:

Bloomberg News

Matthew Boesler

Published Sep 13, 2023 • 1 minute read

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(Bloomberg) — A monthly report on US consumer prices due Wednesday is set to show a third month of subdued core inflation, adding to the case against more Federal Reserve interest-rate increases, according to Bloomberg Economics.

Another tepid advance for prices excluding food and energy of 0.2% in August would probably be more important to Fed officials than an energy-driven rebound in the overall consumer price index, which may have risen 0.6%, Bloomberg economists Anna Wong and Stuart Paul wrote Tuesday in a preview of the report.

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“Monthly headline inflation should be robust, while annualized core inflation will stay near the Fed’s 2% inflation target for a third straight month — the longest stretch of subdued core readings since inflation surged in early 2021,” Wong and Paul said.

“We think policymakers will look through the hot headline and take solace in the stretch of soft core inflation readings.”

Read More: US PREVIEW: Soft August Core CPI to Trump Hot Headline for Fed

Slowing core inflation over the last two months has raised hopes that the Fed will cease rate increases after lifting the target range for its benchmark in July to 5.25% to 5.5%, the highest level in 22 years. Investors currently see the chances of another rate hike in 2023 as a bit below 50%, according to futures.

While central bank officials including Fed Chair Jerome Powell have welcomed the progress seen in recent inflation reports, they’ve also stressed that the fight isn’t over, and warned that ongoing strength in the economy could require another rate increase.

Rising oil prices have also complicated the outlook, leading to higher gasoline prices and fanning fears that the central bank may opt for more tightening.

“Driven mainly by oil prices, the hot headline figure may lead markets to bet on additional rate hikes. We think that would be the wrong takeaway,” Wong and Paul said. “Increasingly, evidence of rapidly cooling wage growth and a slowdown in hiring should convince skeptical Fed officials that rates are already sufficiently restrictive.”

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