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FollowingEconomists expect: Energy costs push up inflation, core inflation moderate
Economists expect that the annualized growth rate of the consumer price index (CPI) of 3.4% year-on-year in August will rise further due to rising energy costs. Core inflation excluding food and energy is forecast at a more moderate 2.5%, highlighting the widening gap between oil-driven price pressures and underlying inflation.
The Consumer Price Index report will be released on Wednesday, October 14, two weeks before Fed officials decide whether to keep interest rates unchanged or tighten monetary policy again.
U.S. CPI may hit 3.7% after soaring oil prices
As conflict in the Middle East disrupts global fuel supplies, energy has become the main source of a new round of inflationary pressure. Brent crude oil prices remain above $100 per barrel, increasing the cost of transportation, manufacturing and family living.
The August inflation report has shown its impact: gasoline prices rose 3.9% that month. The overall CPI increased by 0.4% month-on-month, while the annual core inflation rate slowed to 2.4%. If the September data reaches 3.7%, it will mark a further acceleration in overall consumer prices, which will further complicate the Fed's efforts to control inflation.
However, an expected core inflation rate of 2.5% suggests that broader price pressures may remain relatively manageable in addition to energy-driven inflation.
The Federal Reserve faces decision-making moment on October 28
The Federal Reserve raised its benchmark interest rate by 25 basis points in September, adjusting its target range to 3.75%-4.00%. Minutes of the meeting released on October 7 showed that policymakers remained concerned about persistent inflation but were reluctant to commit to repeated interest rate hikes.
The market currently generally expects the Federal Reserve to keep interest rates unchanged in October, although the possibility of another rate hike later this year still exists.
The difference between CPI and the Personal Consumption Expenditure Price Index (PCE) is also crucial. Although CPI provides early signs of inflation, the Fed's official 2% inflation target is based on the personal consumption expenditure price index. Still, if the CPI data is higher than expected, expectations for the future direction of interest rates could still be changed.
What impact will a 3.7% inflation rate have on the stock market?
While Wall Street is focusing on inflation reports, Treasury yields are at multi-year highs. The yield on the benchmark 10-year Treasury note recently reached about 5.36%, putting additional pressure on technology stock valuations and borrowing costs.
The recent sell-off of government bonds illustrates how quickly inflation concerns spread to equity and other financial markets. Higher-than-expected inflation data could push bond yields up again, while milder data could reduce expectations of further policy tightening.
