US: Inflation and FOMC Minutes till favour further tightening – UOB

UOB Group’s Head of Research Suan Teck Kin and Senior Economist Alvin Liew assess the latest US inflation figures and the FOMC Minutes.

Key Takeaways

“US headline consumer price index (CPI) increased by 0.1% m/m, 5.0% y/y in Mar (from 0.4% m/m, 6.0% y/y in Feb), slightly below Bloomberg’s survey and was also the lowest y/y headline reading since May 2021. However, core CPI (which excludes food and energy) proved to be stickier, as it rose sequentially at a faster m/m pace than the headline, at 0.4%, (from 0.5% in Feb). On a y/y basis, the Mar core CPI rose slightly faster to 5.6% (Feb: 5.5%).”

“US Inflation Outlook – For the full year, we still expect both headline and core inflation to average 3.0% in 2023, above the Fed’s 2% objective. But the 1Q CPI data showed that the balance of risk for US inflation remains on the upside as reflected by the persistent rise of shelter costs, still elevated food costs and components within core and services inflation remain elevated and rising.”

“Mar FOMC Minutes – Fed officials scaled back rate hike expectations this year due to the financial sector turmoil and monitoring for signs of a credit crunch. That said, Fed policymakers still raised their benchmark lending rate by 25-bps to a range of 4.75% to 5.00% in Mar, as they sought to balance the risk of a credit crunch with incoming data showing price pressures remained elevated. And furthermore, they did so even after taking into account that Fed staff economists were forecasting a “mild recession” later this year with recovery over the next two years.”

“FOMC Outlook – If our base case of no systemic impact on the US financial sector remains valid, it is reasonable to expect the US Fed to continue to stay focused on fighting inflation and push forward with its rate hike cycle. Thus, we will continue to assign a high probability the Fed will hike rates by a final 25bps to 5.00-5.25% at the upcoming May FOMC. We expect no rate cuts this year and this terminal rate of 5.25% to last through 2023.”