Importantly, these categories – particularly gasoline – pressed the Fed and warranted a frontloading of interest rate hikes as they risked unanchoring inflation expectations. Looking ahead, this means incentives for the Fed to frontload interest rate hikes have diminished, but there are still significant reasons to keep rising interest rates and keeping them elevated for a longer period.
Deciding how high the Federal Funds Rate has to go and when to pivot the Fed will focus on the economies underlying inflation trend and disregard noisy signals. Here, the fact is that core CPI remains elevated and broad-based. The Atlanta Fed Sticky Core CPI printed at 5.2% annualised in July and the Cleveland Fed’s Median CPI came in at 6.5% annualised. To top that 56% of the core CPI items rose by more than 4% annualised in July.
Measuring quarterly trends across various inflation baskets there is little evidence of a lower core inflation trend. In fact, year-on-year core inflation is unlikely to have peaked. In a broader context we continue to see price pressure with wages increasing and productivity clearly falling. Unless output materially declines – which is not our base case – this is unlikely to result in inflation getting on a trajectory that will allow the Fed to pivot or stop hiking interest rates just yet.- Nordea
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