Hotter US inflation leaves the market gunning for rate hikes
The recent print of hotter-than-expected September core inflation has reinforced expectations for further Federal Reserve interest rate hikes. Per the full note from ING, the data revealed a core inflation increase of 0.3% month-over-month, slightly above the consensus forecast of 0.2%. This unexpected rise in inflation, driven primarily by higher shelter costs, energy prices, and a significant spike in gasoline prices, suggests that the Fed might have more tightening ahead, despite some signs of stagnation in wage growth and permeating weakness in the housing market. The desk believes that unless these persistent inflationary pressures abate, the market should be prepared for potential changes in the Fed's policy trajectory.
What the desk is arguing
The desk maintains that the recent higher-than-expected core inflation figures will likely lead to increased scrutiny of the Federal Reserve's rate-setting path. As reported by ING, the core inflation rose 0.3% month-on-month, contrasting with the anticipated increase of 0.2%, signaling stronger-than-expected price pressures that may compel policymakers to act.
The pressure is underscored by specific components in the index, particularly a notable 0.4% increase in shelter costs and a 9.1% jump in gasoline prices. Even if parts of the economy reflect stagnant inflation, the overall trend suggests that the Fed may not be done with tightening measures yet.
Where it sits in our coverage
Our FX coverage indicates a consensus target for USD/EUR at 1.075, with a range spanning from 1.04 to 1.12, as reported by various firms. Notably, jpmorgan stands firm with a target of 1.10 for March 2026, while bofa provides a conservative stance projecting 1.04 for the same tenor.
This view aligns with our expectations of sustained strength in the dollar following the inflation report, placing this outlook on the upper end of the range.
How other firms see it
There is a broad consensus among firms like jpmorgan and goldman that the rising inflation could prompt further Fed action, bolstering the USD against major pairs. Conversely, firms like bofa question the sustainability of such a trend and maintain a more cautious stance on dollar strength in the mid-term.
Traders should be particularly sensitive to the USD/EUR currency pair, as its trajectory reflects central bank sentiment and market expectations regarding policy adjustments, especially following this inflation data.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01September core inflation rose 0.3% MoM, exceeding expectations of 0.2%.
- 02A 9.1% increase in gasoline prices significantly contributed to this inflation spike.
- 03The market anticipates potential further tightening from the Federal Reserve.
- 04Weakness in wages and housing may provide a counterbalance to inflationary pressures.
Market implications
Traders should monitor movement in the USD/EUR pair closely, particularly as its reaction to upcoming Fed communications will be telling about future rate expectations. The current core inflation print positions the USD for possible strengthening or further volatility depending on subsequent economic data.
Risks to this view
A significant shift in inflation trends, particularly a noticeable decrease in shelter costs or overall economic slowdown, could undermine the case for further rate hikes and lead to a retraction in any USD strength.
Articles Hotter US inflation leaves the market gunning for rate hikes Published 14:09 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download September core inflation was hotter than expected and this has reinforced the view that the Federal Reserve has more work to do to contain price pressures. The risks are skewed towards further policy tightening than we are expecting, but with wage growth looking so benign and the housing market in a weak state, the scope for an eventual reversal is high James Knightley A 9.1% month-on-month increase in gasoline prices led the September headline index higher Core inflation rises on shelter, energy, airfares and used vehicles September headline CPI came in at 0.6%MoM/3.7%YoY, as expected, but core inflation was a touch hotter than anticipated, rising 0.3%MoM/2.6%YoY (0.2%/2.5% was the consensus forecast). We'd suggested we saw slight upside risk to the core figure with the details showing the largest component by weight, shelter, coming in hotter at 0.4% month-on-month after three consecutive softer prints, averaging 0.2% MoM.
Airline fares rose 1.2% MoM on higher fuel costs while the shutdown of Spirit Airlines has removed competition. Meanwhile, used vehicles rose 0.7%, recreation up 0.5% and a 9.1% MoM jump in gasoline prices led the headline index higher. There are pockets of softer price gains, such as food (0.0%), medical care (+0.1%) and education & communication (0.2%), but as the chart below shows, core inflation continues to track too high for comfort with the MoM rates (the blue bars) trending well ahead of the 0.17% MoM black line that we need to average to bring the annual inflation rate down to 2% over time.
US core inflation metrics Macrobond, ING "> Macrobond, ING Risks of additional rate hikes remains high In aggregate, it probably isn't quite strong enough to push the Federal Reserve to hike again in October given the recent run of comments from officials, who suggest they are in no hurry to hike after September's 25bp move. Nonetheless, markets have moved sharply with futures contracts putting a 45% chance of an October hike, up from around 20% just ahead of the data. In terms of the outlook for inflation, much hinges on what happens with the Strait of Hormuz.
Refined fuel prices continue to rise and run the risk of feeding through into a broader range of categories. At the same time, the tech/AI data centre roll out is adding to price pressures. That said, Federal Reserve rate hikes will have limited impact on these two price drivers.
In any case, the cooling housing market should translate into softer shelter inflation prints, while a less onerous tariff regime should also help. The key story though, is wage growth, which is the biggest cost input for corporate America. The low hire, low fire economy means there is little turnover in the jobs market, which is highly correlated with wage growth.
Wages are currently running at just 3%, with the risk that we see a further slowdown coming through. While bad news for households, this will help to dampen price pressures over the medium to longer term. Right now our forecast is for a December Federal Reserve rate hike before a long pause, but the risks to that view are skewed towards the Fed moving rates even higher before rate cuts come through.
US Prices Inflation Federal Reserve Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York.
He joined the firm in 1998 in London and has been covering G7 and Western European economies. He studied economics at Durham… In this article Core inflation rises on shelter, energy, airfares and used vehicles Risks of additional rate hikes remains high
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