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Below the Quote on US inflation: Higher inflation increases pressure for a further rate hike By David Kohl, Chief Economist, Julius Baer

US inflation rose 0.4% m/m in October, above expectations but slower than in previous months as petrol price pressures eased. Core inflation remained slightly firm, driven by services, while shelter costs moderated. With inflation still too high but not re-accelerating, the Fed is expected to raise rates by 25bp in December before adopting a more gradual policy stance.

Consumer prices in the US rose by 0.4% m/m in October, exceeding consensus forecasts; however, the increase was smaller than in previous months, when consumer prices had risen by 0.6%. As the October Consumer Price Index (CPI) from the previous year was not published due to the government shutdown, no y/y inflation rate was available. Following a 9.1% jump in September, petrol prices rose by just 1%, thereby contributing significantly to the marked slowdown in inflation. Nevertheless, the higher-than-expected inflation figures, combined with earlier comments by Fed Governor Christopher Waller – who advocated a half-percentage-point interest rate rise should inflation continue to accelerate – led to a significant reassessment of the expected interest rate path. The implied probabilities now stand at 85% for a 25bp rate rise at the December FOMC meeting, 15% for a 50bp rate rise, and 0% for the policy rate to remain unchanged. Underlying price pressures, as measured by the CPI excluding food and energy, also came in slightly stronger than expected, slowing only marginally from 0.33% in September to 0.3% in October. The shelter component, the largest component of the CPI, slowed from 0.4% to 0.3%, and core goods prices also showed a smaller increase. Only core service prices, excluding the shelter component, recorded a rise, with prices for transport and recreation services rising more rapidly. Overall, US inflation in October shows little sign of accelerating underlying inflationary momentum. At the same time, US inflation remains too high for the Fed, making a further interest rate rise at the next FOMC meeting inevitable. Against the backdrop of falling oil prices – which will be reflected in lower energy prices in the coming months – and in view of tightening financial conditions – as bond yields have risen again and there has been a significant sell-off in the equity markets – we expect the Fed to take a gradual approach to recalibrating its monetary policy and to raise interest rates by 25bp in December. Thereafter, it will rely on base effects and headwinds to growth that would allow inflation to move closer to its 2% target. 

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