The Fed is on track to hike in December given strong inflation
Still-high core inflation points to the Fed resuming raising rates in December.
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After holding steady ahead of next week’s mid-term elections, the Fed should resume raising rates in December given still-high core inflation, upside inflation risks, and no estimated slack in the labour market. A strong gain in the monthly core PCE deflator in September – which is the Fed’s preferred measure of core inflation – supports this view.
The core PCE deflator matched market expectations, up another 0.3% in September (the monthly gain in August initially rounded down to 0.2% and now rounds up to 0.3%). Annual inflation was 3.1% and has ranged between 2.9-3.1% since December. An alternative indicator of core inflation belonging to the class of measures previously favoured by Fed Chair Warsh, namely the trimmed mean PCE deflator, rose by 0.2% for the third month in a row and is up 2.3% over the past year.
- Core goods prices rose by 0.2% and are 2.0% higher than a year ago. Tariff effects on goods prices are fading, but there is a boost from the AI boom and likely some impact from both high and volatile energy prices and global supply chain disruptions.
- Core services prices increased by 0.4% in September (also 0.4% excluding housing) and are 3.5% higher than a year ago (3.6% excluding housing).
- On CCI's estimation, tech prices are up 6% over the past year, adding 0.3pp to annual core inflation, contrasting with the pre-COVID experience when falling tech prices would usually subtract about 0.2pp from annual inflation.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
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