US CPI Report: Treading Carefully In Case of New Inflationary Pressures
Wednesday’s CPI release is set to provide another critical data point for the Fed as it weighs up the path back to its 2% inflation target. The consensus expects October’s headline CPI to rise by +0.2% month-on-month, matching September’s increase, with core CPI projected to print at +0.3%. This outlook aligns with Wells Fargo’s view that while food price gains may have tempered overall inflation in October, the deceleration could be modest. After a notable 0.4% jump in grocery prices in September, Wells Fargo anticipates only a slight 0.1% rise in October—signaling the possibility of a more measured increase.
Yet, it’s not all smooth sailing. Energy price pressures, while subdued recently, present a notable upside risk given heightened geopolitical tensions in the Middle East. Any sustained increase in energy costs could disrupt the gradual unwinding of pandemic-driven price distortions, especially in areas outside of energy and food. Wells Fargo’s projection of a 0.28% monthly gain would push the 3-month annualized core CPI rate to 3.6%, maintaining the 12-month rate at 3.3%. However, oil markets seem pretty pressured in the near term.
From the Fed’s perspective, the journey back to 2% remains incomplete, albeit with progress. Chair Powell recently acknowledged that while inflation has cooled, core inflation remains “somewhat elevated.” He emphasized that 80% of the price basket is now more in line with the Fed’s long-term objectives, although housing remains a prominent exception.
Adding to the complexity is President-Elect Trump’s anticipated policy agenda, which could introduce new inflationary pressures. His campaign proposals suggest a potential uptick in spending and fiscal stimulus, factors likely to complicate the Fed’s already challenging task. In this context, any inflationary signals in the upcoming CPI report will be scrutinized for how they align with these broader fiscal considerations.
Ultimately, the Fed’s current stance points to a cautious approach, with Powell signaling that while the latest inflation print “wasn’t terrible,” the path forward demands vigilance. An uptick in inflation could reinvigorate concerns of a prolonged fight against inflation—especially if future fiscal policies amplify price pressures. For now, a balanced, data-dependent approach appears likely, but Wednesday’s CPI numbers will be key in determining the Fed’s degree of caution heading into 2024.Expect a big beat in the headline to lift the USD and send the EURUSD sharply lower with buyers at market.