Today’s CPI release is the most important print driving the Fed’s interest rate decision at its upcoming FOMC meeting, set for October 28. Its sensitivity could not be higher, given the midterm elections on November 3.
Unfortunately, both Headline CPI and Core CPI came in hotter than expected. Headline CPI came in at 3.7% YoY (0.6% MoM). Core CPI reached 2.6% YoY (0.3% MoM).
Source: BLS
Both readings are higher than the previous month’s, moving away from the Fed’s inflation target. Notably, gasoline prices rose by 9.1% MoM and fuel oil by 15.3% MoM. On a 12-month basis, they are up 34% and 74% respectively. This underscores the motivation behind Trump’s energy ceasefire with Putin.
Core CPI components are also running persistently hot. Used cars are up 0.7% MoM, shelter is up 0.4% and transportation services are up 0.6%.
The market has repriced bond yields across the curve. Thirty minutes after the print, the 2-year Treasury yield was up 14bp, while the 10-year Treasury yield was up 10bp.
The chance of a Fed hike this month has risen to about 50%, i.e. a coin flip. I maintain the view that the Fed will benefit more from hiking this month than from waiting until December. If they hike now, they gain the optionality to deliver a third hike in December if needed. Postponing the hike will reduce flexibility.
However, the elephant in the room is the November midterm elections. A Fed hike right before the elections could be seen as “politically motivated”, which would not please the White House.
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