(Kitco News) – Tuesday morning’s consumer price index report for October will likely show price pressures moderating in line with economists’ expectations, but while there is little evidence that U.S. inflation is reaccelerating, the road back to the Fed’s target looks to be a bumpy one, according to Christopher Hodge, Head Economist for the U.S. at Natixis.
Hodge wrote in Natixis’ CPI preview that they expect no surprises from tomorrow’s inflation data.
“We expect inflation to ease a bit in October from September’s pace and mark the beginning of a trend of subdued prints,” he said. “We think core CPI will rise about 22bps on the month and headline will increase 29bps. Due to the government shutdown last year, the yearly inflation rate will not be published, but if in line with our forecast, the 3m annualized rate will remain steady at 3.4% and the 6m annualized rate would fall to 2.5%.”
“We think the slowdown in core CPI will stem from a reversion of shelter prices, primarily owners’ equivalent rents and lodging away from home,” he added. “Similarly, the stabilization in diesel prices should help to quell price pressures in energy-intensive goods.”
Hodge said that while an in-line CPI report would be encouraging to the newly hawkish Federal Reserve, it will still be significantly above the 2% goal and will not prevent another rate hike in 2026 if the central bank believes this is necessary.
“With inflation sticky above the target and the labor market stable, (and based on October’s Employment Situation Report, perhaps strengthening)… we think another hike will be warranted in December,” he wrote. “After that, though, we see an extended pause. September’s hike, in the words of Fed Chair Kevin Warsh, “removed a dose of accommodation” and we think the volatility in asset markets has perhaps removed another dose since then.”
“We don’t see much of an inflationary impulse from the labor market, despite its stability, and expect the supply-side drivers of price pressures to fade,” Hodge added. “In addition, financial conditions have moved closer to neutral. Amid greater headwinds to growth and perhaps more fragility in financial markets, we think the Fed will be hesitant to overtighten should disinflation continue in line with our forecast.”
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