US: Rate hike forecasts unchanged after CPI data - ING

Data released today showed that the Consumer Price Index dropped to 2.2% during November in the US. James Knightley, Chief International Economist at ING, warns it reflects a $25/bbl plunge in oil prices since October and the without oil, “core” inflation is up and will continue grinding higher as spare capacity in the economy shrinks.

Key Quotes: 

“The main drag was energy because of the $25/bbl drop in the price of oil seen over the past two months with gasoline prices falling from a national average of $2.92/gallon at the beginning of October to $2.41 currently. There was also weakness in apparel, transport fares and personal computers.”

“We suspect that this core measure will continue grinding higher through the first half of 2019. The US is largely a service sector economy and the biggest cost input is labour. Average earnings are rising with the Federal Reserve also noting a pick-up in non-wage benefit costs such as paid vacation days, signing bonuses and healthcare packages so in an environment of decent growth there is a good chance firms will look to pass these costs onto consumers.”

“With core inflation set to break above 2.5% YoY next year and the economy likely to experience solid, if somewhat slower growth than in 2018, the arguments for interest rate increases from the Federal Reserve will remain strong. President Trump will not like it, but we fully expect a 25bp rate hike at the 19 December FOMC meeting. We are currently forecasting three further 25bp rate hikes next year, but this is subject to downside risks given escalating trade fears.”