MUFG sees September US CPI at 3.6%; core surprise needed for October Fed hike

MUFG’s analysis stresses that energy has accounted for nearly all of the pickup in US headline inflation since the Iran conflict started, keeping crude prices closely tied to how the Fed is expected to move. For rates markets, the core figure is the deciding factor. A monthly gain of 0.2%, matching forecasts, would probably keep pricing for an October move muted and leave the dollar and Treasury yields within recent ranges. Another 0.3% increase, as in August, would bring back wagers on a second consecutive hike and push up the front end. Thursday’s retail sales data, if robust, would strengthen the argument that the economy can handle tighter monetary policy. Warsh’s remarks early Friday could then shift expectations in either direction before the October 27-28 meeting.

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Earlier:

• US CPI preview: energy expected to push inflation to 3.7%, core seen at 2.4%

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Energy is behind the headline damage; the question for the Fed this week is whether other price pressures are beginning to emerge.

Summary:

• MUFG sees September US headline inflation at 3.6%, with higher energy costs since the US-Iran conflict began accounting for nearly all of the rise.
• After a 0.3% monthly core increase in August driven by services, the forecast is for a 0.2% gain in September.
• The bank reckons an upside surprise in core would likely be required to revive market pricing for consecutive Fed hikes this month.
• Thursday's retail sales are seen confirming robust third-quarter consumer spending.
• Fed Chair Kevin Warsh appears at the IMF Annual Meetings in Bangkok early Friday, his first public comments since the September FOMC.

The US inflation data due Wednesday is the week's dominant economic event. MUFG's view is that the crucial issue is not the level of headline inflation but whether price pressures are broadening beyond energy.

The September CPI report is expected to put headline inflation at 3.6%, according to MUFG. The bank points out that energy prices have powered nearly the entire advance since the US-Iran conflict began, leaving the Fed and markets to watch core inflation for early evidence of wider pressure. The figures arrive at 12:30 GMT (8:30 ET).

Excluding food and energy, core prices rose 0.3% on the month in August, with services leading the way. MUFG forecasts a pullback to 0.2% for September. In the bank's view, reviving market pricing for another hike as early as this month would probably require another upward surprise in core, after the Fed lifted its target range to 3.75% to 4.00% in September.

Such expectations have cooled. Following September payrolls that added just 29,000 positions, wagers on an October hike fell sharply, and the market now sees a December hike as the main scenario. A stronger core print would undercut that outlook, while a consensus result would probably confirm it.

September retail sales, out Thursday at 12:30 GMT (8:30 ET), are expected to show consumer spending kept expanding at a solid clip in the third quarter, indicating the economy has so far weathered higher energy costs and tighter policy.

Fed Chair Kevin Warsh closes the week with a fireside chat at the IMF Annual Meetings in Bangkok, scheduled for around 04:30 GMT Friday (00:30 ET). Since the September meeting, he has not spoken publicly, so his comments will be examined closely for direction before the October 27-28 decision. Warsh has steered the Fed away from explicit forward guidance, and markets will probably watch how he talks about inflation rather than for hints on timing.