US: Elevated inflation opens the door to further large rate hikes – UOB

Alvin Liew, Senior Economist at UOB Group, comments on the latest results from US inflation figures.

Key Takeaways

“US headline consumer price index (CPI) inflation was off from recent highs but still elevated at 8.2% y/y in Sep (from 8.3% y/y in Aug), above Bloomberg’s estimate of 8.1%. On a m/m basis, the headline CPI picked up pace, increasing 0.4% m/m  (versus 0.1% in Aug) and faster against Bloomberg’s estimate of an increase by 0.2% m/m.”

“The bigger concern was the core CPI inflation (which excludes food and energy) which continued to race higher sequentially, reflecting unabating underlying momentum for price pressures. On a m/m basis, core inflation rose by a faster pace of 0.6% in Sep (same pace as Aug, and above Bloomberg estimate of 0.4%). Compared to a year ago, it rose 6.6% y/y in Sep, up from 6.3% y/y in Aug, above Bloomberg estimate for 6.5% and highest since Aug 1982 (7.06%).”

“While the latest US headline inflation printed further below the 9.1% recorded in Jun, this reflected mainly the decline in gasoline prices but core inflation continued to climb as the cost of living is still materially high, reflected by the persistent rise of food and shelter costs, and that services inflation is rising amidst ample demand. Risks from several potential inflation shocks include rising labor tensions, a new round of global energy price increases, further disruptions in supply chains, on-going impact from the Russian-Ukraine conflict, and a larger-than-expected pass-through of wage increases into price increases. We maintain our headline CPI inflation forecast to average 8.5% and our core CPI inflation forecast at 6.5% for 2022. Subsequently, we still expect both headline and core inflation to ease in 2023, but it will likely average at 3.0%, above the Fed’s 2% objective. The balance of risk on inflation remains on the upside.”

“The latest inflation print is in line with our US inflation outlook and does not change our Nov Fed view, and we maintain our expectations for the FFTR to be hiked by another 75 bps rate hike in Nov FOMC to the range of 3.75-4.00%. We expect the Fed to end the year with a 50bps hike in Dec but admittedly the market sentiment has shifted firmly to another jumbo hike in Dec following the latest CPI developments. Including the hikes so far in 2022, this implies a cumulative 425bps of increases in 2022, bringing the FFTR higher to the range of 4.25-4.50% by end of 2022 with risks for a bigger hike in Dec versus our current projection. We maintain our forecast for one more 25bps rate hike in Feb 2023, bringing our terminal FFTR higher to 4.504.75% by end 1Q-2023, and a pause to the current rate hike cycle until 1Q 2024.”