Easing in US inflation pressures in recent months took a step back in September – RBC

Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada, assesses the latest inflation data from the US and how they could influence the Federal Reserve's policy outlook.

We don't expect additional rate hikes this year

"The substantial easing in US inflation pressures in recent months took a step back in September with year-over-year price growth holding steady at a 3.7% rate (in line with August but up from 3.2% in July and 3.0% in June.) That was slightly above market expectations ahead of the report."

"The Fed's 'supercore' (core services excluding home rent component) jumped  0.6% month-over-month, bringing the most recent three month annualized growth rate to 4.8% from 2.2% in August. A jump in hospital prices explains part of the upside surprise in September, but that ended a string of sub-pre-pandemic readings for that measure that started in June." 

"Fed policymakers are wary of a reacceleration in price growth with the economy still running exceptionally hot. The September data follows a string of downside surprises that left a substantially softer-than-expected broader price growth backdrop over the summer - and the upside surprise in the latest month shouldn't be enough to change that broader narrative. But the Fed's pause in interest rate hikes is really a function of soft inflation prints allowing policymakers patience to wait for an exceptionally strong (and probably overheating) growth and labour market backdrop to cool.  We don't expect additional interest rate hikes this year will be necessary, but the Fed is still willing to respond with higher interest rates were the inflation backdrop to show further signs of reacceleration."