**As seen in Risk In The Week report 10/06/23, subscribe at cablefxm.co.uk/reports
August consumer prices surprised economists as the headline metric showed a rebound to 3.7% Y/y from the prior 3.2%, the median survey had seen a rise of 3.6%. The core print came in at 4.3% Y/y, in line with estimates. The metric excluding food, energy, and shelter rose by 2.24% Y/y and 0.27% M/m. Fed Chair Powell has been vocal on the “super core” figure, August saw the rate rising at the fastest pace since March at 0.37% M/m, this isn’t what the FOMC would like to see as it shows a lack of deflationary progress. Also, high energy prices have been in focus as crude oil benchmarks traded higher, the August CPI report showed gasoline prices contributing to more than half of the gain. Another component that caught investors’ attention was airline fares as they rose for the first time since March, transportation was the biggest contributor to the "super core" CPI. Analysts debated whether the rise in airfare could be attributed to the increase in energy prices or a surge in travel demand. The median projection sees prices decelerating into year- end, 4Q CPI is penciled at 3.3%, BofA and Goldman Sachs forecast a 3.5%, ING expects prices at 3.7%, Nomura and Morgan Stanley predict a 3.2%. Economists do not see consumer prices accelerating below 2.0% over the forecast horizon. More recently, Fed officials have warned that the path back to target is likely to be “bumpy” and could set interest rates to stay higher for longer. Analysts at Commerzbank expect the contribution from energy prices to ease in September and said that this will lead the market to focus on the core print, they pencil the metric rising at the same 0.3% rate from last month. Economists at ING noted that a monthly core rate above 0.2% M/m could keep an additional Fed rate hike alive for November or December. Recently, Nordea flagged risks of policy moves during the last two meetings of the year on higher energy prices, they have seen crude rising to $120/bbl if OPEC+ holds to production cuts. For next year, the desk at BofA noted a reduction of Fed rate cut bets after the FOMC met, SOFR calendar spreads are now pricing two 25bps rate reductions from a prior four. BofA added that this is the lowest rate cut pricing for the Fed relative to the ECB since the latter started hiking rates. Given that the market is already positioned for U.S. exceptionalism, the risk is that we get the opposite, BofA said.
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