Let me begin by stating my agreement that the Federal Reserve is unlikely to raise interest rates imminently. However, basing this expectation solely on the latest inflation figures seems overly optimistic. The recent data, after all, were not exceptionally positive.
Inflation quickens
October saw U.S. headline inflation drop to 3.2%, a decrease greater than anticipated. This figure approaches the target of approximately 2.0%, though the final decline remains pending. Core inflation also decreased more than expected, yet it persists at 4.0%, twice the target.
For some time, Powell has endeavoured to minimise the significance of these two inflation figures. To gain a clearer understanding of inflation during this period, we have focused primarily on the three-month annualised core services Consumer Price Index (CPI). This has become a common practice.
Given that these core services constitute only a minor portion of the overall inflation basket, I analyse six different CPI metrics in my U.S. Inflation Monitor. The following are the three-month annualised rates for October (with September’s figures in parentheses):
- Headline CPI: 4.4% (4.9%)
- Core CPI: 3.4% (3.1%)
- Core services excluding housing: 4.9% (4.8%)
- Core services excluding shelter: 5.5% (4.9%)
- Median CPI: 4.5% (4.0%)
- Core food excluding shelter: 4.1% (3.2%)
Consequently, five out of six CPI measures increased in October. Notably, core services excluding housing marked its fourth consecutive rise, and core services excluding shelter its third. Furthermore, this CPI inflation stood at 5.5%, a figure significantly above the ideal range. All six three-month annualised CPI measures exceeded the reported headline inflation rate of 3.2%.
Persistent concerns
Clearly, Powell and his team favour a gentle economic descent, showing little inclination towards further rate hikes. Powell has scarcely mentioned his longstanding inflation concerns, signalling the Fed’s shift towards broader inflation trends.
Additionally, if inflation expectations align with the reported inflation, the Fed might reduce rates sooner to avert further increases in real rates.
In this context, a degree of optimism is reasonable. However, it is important to recognise that a quicker-than-expected reduction in inflation could also indicate a deceleration in economic growth. Nevertheless, considering all the incoming inflation data for October, the situation appears more nuanced than the market reaction might suggest.
Jeroen Blokland, founder of True Insights – a platform offering independent research for diversified multi-asset portfolios – was previously head of multi-assets at Robeco. His ‹Chart of the Week› is featured every Monday on Investment Officer Luxembourg.