US CPI: ING Keeps December Fed Hike Forecast Despite Stronger Inflation
The US Dollar exchange rates rose after stronger core inflation revived Fed hike bets, but ING still expects December action as RBC warns of broader price pressure.
The US Dollar strengthened on Wednesday after September inflation challenged hopes that an energy-led price surge would leave underlying pressures relatively contained.
RBC sees evidence that higher costs are spreading through the economy, while ING still expects the Federal Reserve to wait until December before raising interest rates again.
At the time of writing, GBP/USD was around $1.3153, down 0.8% on the day, while EUR/USD traded near $1.1123.
Pound to Dollar (GBP/USD): 1.314257 (-0.86%)
Euro to Dollar (EUR/USD): 1.111576 (-0.76%)
Dollar to Yen (USD/JPY): 158.81057 (+0.30%)
The official September CPI figures showed core prices, excluding food and energy, rose 0.3% on the month against expectations of 0.2%.
Annual headline inflation reached 3.7%, with petrol accounting for more than half the monthly increase in the overall index.
The core increase exceeded most forecasts in Exchange Rates UK’s eight-bank inflation preview, where most monthly core forecasts rounded to 0.2%.
Higher prices reach beyond the petrol pump
RBC’s economists see a broader acceleration in goods prices, including imported products exposed to tariffs and higher transport costs.
Used cars have now become more expensive for three consecutive months, suggesting the latest increase is part of a developing trend.
They warn that rising vehicle and repair costs could subsequently affect car insurance, while expensive freight could eventually put pressure on grocery prices, which have so far remained relatively subdued.
That makes the persistence of the energy shock important even when assessing an inflation measure that excludes fuel itself.
ING’s James Knightley, Chief International Economist, US, points to another channel already visible in September: “Airline fares rose 1.2% MoM on higher fuel costs while the shutdown of Spirit Airlines has removed competition.”
Knightley writes: “In terms of the outlook for inflation, much hinges on what happens with the Strait of Hormuz. Refined fuel prices continue to rise and run the risk of feeding through into a broader range of categories.”
“At the same time, the tech/AI data centre roll out is adding to price pressures. That said, Federal Reserve rate hikes will have limited impact on these two price drivers.”
Borrowing costs can restrain demand, but they cannot directly restore disrupted fuel supplies.
For the Dollar, the immediate support comes from investors allowing for higher US interest rates, improving the prospective return on Dollar assets.
ING keeps December in view as October bets rise
ING recorded a sharp repricing immediately after the release: “Nonetheless, markets have moved sharply with futures contracts putting a 45% chance of an October hike, up from around 20% just ahead of the data.”
Knightley remains cautious about bringing the next increase forward: “In aggregate, it probably isn’t quite strong enough to push the Federal Reserve to hike again in October given the recent run of comments from officials, who suggest they are in no hurry to hike after September’s 25bp move.”
Beyond the next meeting, housing is an important point of disagreement between the banks.
Knightley writes: “We’d suggested we saw slight upside risk to the core figure with the details showing the largest component by weight, shelter, coming in hotter at 0.4% month-on-month after three consecutive softer prints, averaging 0.2% MoM.”
RBC believes most of the relief from slower housing inflation has already passed through, given the lag between market housing indicators and the CPI’s measure of owner-occupied housing costs.
ING expects further help from that source, despite September’s firmer shelter reading.
Knightley writes: “In any case, the cooling housing market should translate into softer shelter inflation prints, while a less onerous tariff regime should also help.”
He places greater weight on labour costs: “The key story though, is wage growth, which is the biggest cost input for corporate America. The low hire, low fire economy means there is little turnover in the jobs market, which is highly correlated with wage growth.”
“Wages are currently running at just 3%, with the risk that we see a further slowdown coming through. While bad news for households, this will help to dampen price pressures over the medium to longer term.”
RBC sees upside risk to the Fed’s preferred PCE inflation measure, although Thursday’s producer-price figures, particularly medical services and airfares, will help determine that outlook.
Knightley concludes: “Right now our forecast is for a December Federal Reserve rate hike before a long pause, but the risks to that view are skewed towards the Fed moving rates even higher before rate cuts come through.”
US inflation (CPI) reaction FAQs
Why did the US Dollar rise after inflation?
Core inflation exceeded expectations, prompting investors to increase their bets on another Fed rate rise and supporting the Dollar.
Does ING expect an October Fed hike?
ING still expects the next increase in December, followed by a long pause, although it acknowledges the risk of further tightening.
Why can energy prices affect core inflation?
Core CPI excludes energy prices directly, but higher fuel costs can still raise the prices businesses charge for transport and other goods and services.
