Sticky us inflation justifies a fed rate hike

Key arguments

• Headline CPI matched consensus at 0.4% MoM/3.4% YoY, but core came in at 0.3% MoM (0.290% to three decimals) versus 0.2% expected.
• Monthly inflation needs to average 0.17% to bring the annual rate down to the Fed's 2% target; current prints are running well above that.
• Energy prices rose 2.1% MoM led by a 3.9% gasoline jump, pushing airline fares up 2.7% and education/communication prices up 1.6%; apparel, recreation, food and housing were benign.
• The Fed's favored core PCE deflator is running even hotter at 3.3% YoY.
• Fed Chair Kevin Warsh's hawkish Jackson Hole stance and full-employment conditions with non-restrictive financial conditions should deliver a majority for a hike.
• ING expects a one-off 25bp hike, not the three further hikes over 12 months priced by futures, citing potential improvement in Strait of Hormuz energy flows, weak wage growth, tariff refunds and a cooling housing market dampening shelter inflation.
• ING frames the move as a Greenspan-1997-style recalibration of policy rather than the start of a sustained tightening cycle.

Corresponding source evidence

1. However, the core inflation index (ex-food and energy) rose 0.3%/2.4%, which is hotter than the 0.2% MoM expected.
2. Remember, we need to average 0.17% MoM over time to bring the YoY inflation rate trending towards the Fed’s 2% target.
3. This outcome has reinforced market expectations of Fed policy tightening next week, with Fed funds futures contracts implying an 85% chance of a 25bp rate hike – an outcome that we fully expect. · next week