US Inflation Analysis: Hiking is hard in the fog, Dollar set to decline (until the next CPI)


  • US core inflation has risen by only 0.3% in October, a welcome relief.
  • Markets are set to reprice the Fed peak rate and rally.
  • The bank's next rate decision hinges on another CPI report.

Democrats must be frustrated – US inflation has finally dropped significantly, but this report came after the elections. But we are not here to talk about the mid-terms– which had little impact on investors – but about the next moves in markets. In short: the party will likely continue.

The US Core Consumer Price Index rose by only 0.3% in October, half of September's rise and below 0.5% expected. The YoY figure advanced by only 6.3% vs. the 6.6% predicted. This is a notable fall. In addition, headline CPI decelerated to 7.7%, which is good news for consumers. 

However, an equal slowdown in Core CPI was also seen in July. When that figure rose by 0.3%, markets rallied, but then faced two consecutive jumps of 0.6%. In short – this could still be a one-off.

Higher rental prices take time to reach official statistics, and demand for other services such as flights remains robust. The unsnarling of supply chains and a cooldown in shopping of goods is behind the recent drop.

The current party in stock markets and the decline in the Dollar will likely continue. The data is probably sufficient to cement a 50 bps hike in December, a step down after four consecutive 75 bps hikes. But what's next?

It is essential to remember that Fed Chair Jerome Powell stressed that the peak interest rate would be higher than 1) What the bank previously expected 2) What markets expected. Beyond December, the Fed could still raise rates, hit a high peak above 5% and hold it there for a long time. 

The next CPI report is published on December 13, and the Fed announces its decision on December 14. A swing back to a strong inflation read – October could be a one-off like July – would change matters significantly. A 50 bps hike in December would be accompanied by forecasts for higher rates.

Enjoy the party, but remember to lock at the clock. 

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