Escalating Inflation Threatens Potential Fed Rate Hike by Year-End

Forecasting Inflation: A Look at the Fed’s Upcoming Decision

The soon to be published September Consumer Price Index (CPI) report is predicted to hint at an inflation rate considerably higher than what the Federal Reserve targets. This, in conjunction with a surprisingly strong jobs report, could prompt the Fed to raise interest rates. The market currently approximates nearly a fifty percent chance that another Federal hike will commence before year-end.

The Market Perspective

Contrarily, according to the swaps market, headline inflation is projected to remain above 3% until January. Such predictions lead us to question whether disinflation trends observed throughout the first half of 2023 have finally been overtaken, especially considering it appears that inflation is stabilizing.

CPI Predictions from Analysts’ Angle

Median forecasts expect a month-on-month rise of 0.3% in CPI, down from 0.6% in August while predicting an annual increase of 3.6%, slightly down from August’s 3.7%. At the same time, they believe that the core CPI will climb by 0.3%, which aligns with August’s numbers but predicts a yearly decrease to 4.1% from 4.3%.

Differing Forecasts on Inflation Rate

However, many CPI models project that headline inflation readings will exceed these median predictions derived from analysts’ forecasts. Predictions by Bloomberg Economics foresee a year-on-year change of approximately 3.74% while both Cleveland Fed and Kalshi are looking at roughly a 3.69% rate. Moreover, the anticipated CPI swap price stands at around 3.55%.

Evaluating Predictive Models’ Performance

While these models have been reasonably accurate in predicting inflation, they’ve historically overshot whenever a disinflationary trend started to take shape during spring and early summers. Interestingly, actual CPI rates in August exceeded those projected by CPI swaps, Kalshi, and Bloomberg Economics.

The Significance of This Month

The performance metrics for this month carry weight as the market expects the year-on-year CPI figure to reach around 3.3% by December. Despite this prediction, non-seasonally adjusted CPI index – which measures yearly inflation rate – has sped up higher than expected over the course of this year’s first eight months, marking a rate close to 5.2%.

Implications for 2023 Inflation Projection

Given these considerations, from October to December the non-seasonally adjusted CPI index must showcase a notable deflationary trend. If predictions fall short and CPI exceeds expectations as proposed by certain models, it would suggest that inflation forecasts for 2023 were underrated and need upward adjustments. Regardless of whether these modifications are made or not, we can assert that significant deviations in overall CPI trends were witnessed post-June report; with most outcomes surpassing market expectations.