Will US Inflation Continue To Accelerate?

Yes, according to economists’ forecast for this Friday’s November update (Dec. 10) on consumer prices.

Econoday.com’s consensus point forecast anticipates that the consumer price index (CPI) at the headline level will ramp up to a 6.8% year-over-year increase. If correct, consumer inflation will accelerate to the highest annual rate since the early 1980s. Core CPI, which strips out volatile food and energy prices, is lower, which is encouraging because this profile of inflation is a more reliable measure of the trend. But here too the outlook for the upcoming November data points to a hotter trend. Core CPI is forecast to rise to 4.9% — the highest since the early 1990s.

The projections are all the more worrisome now that the Federal Reserve has retired the word “transitory” from its vocabulary for assessing the recent inflation surge. Although Fed Chair Jerome Powell is still expecting that pricing pressure will ease in 2022, the decision to retire the word “transitory” from official explanations suggests the central bank anticipates that higher inflation will persist for longer than previously expected.

“Generally, the higher prices we’re seeing are related to the supply-and-demand imbalances that can be traced directly back to the pandemic and the reopening of the economy, but it’s also the case that price increases have spread much more broadly in the recent few months,” Powell advised last week. “I think the risk of higher inflation has increased.”

The shift in tone has juiced expectations that rate hikes are nearer than the market expected previously.

“It looks like the Fed wants to create some space to give them the option to raise rates well before the end of next year if they feel they need to,” says Brian Coulton, chief economist for Fitch Ratings.

Fed funds futures are still projecting a low probability for rate hikes for the near future, but expectations for an increase from the current 0%-0.25% Fed funds target rate are now rising for the months ahead. Starting with a virtually nil probability for a rate hike at next week’s Dec. 15 FOMC meeting, CME data indicates that higher probability estimates unfold quickly for the new year. The first rise above 50% for market-based expectations for a rate hike: the May 4, 2022 Fed meeting.

As for this Friday’s update on November inflation, CapitalSpectator.com’s Inflation Trend Index (ITI) leaves room for a softer-than-predicted increase. Today’s revised estimates for ITI show that inflation pressure is forecast to hold steady in November and December, albeit at a sharply higher level vs. recent history.

Keep in mind that ITI seeks to offer a degree of forward guidance on the directional bias of pricing activity in real time. Note too that ITI is NOT a proxy for estimating the government’s consumer price index. Rather, it’s a profile of price-trend behavior using 13 indicators and naïvely carrying forward the median change to estimate current and near-term-future inflation pressures.

On that basis, the steady-but-elevated ITI readings for November and December hint at the possibility that inflation is peaking. Let’s see if Friday’s CPI data offers any support for that profile.

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By James Picerno

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