Sticky US inflation justifies a Fed rate hike
The FX desk reads the hot August US CPI print as a near-locked catalyst for a 25bp Fed hike at next week's FOMC, with Chair Kevin Warsh pushing the hawkish case and an FOMC majority expected to follow. Per the full note from ING, headline and core both beat: headline matched the 0.4% MoM / 3.4% YoY consensus while core printed 0.290% MoM (2.4% YoY), well above the 0.2% MoM expected and materially above the 0.17% MoM trend rate required to bring inflation to 2%. Critically, the Fed's preferred core PCE deflator is running hotter still at 3.3% YoY — this is not a gasoline-only story. Futures have already priced the move at an 85% probability of 25bp, so the trade is in the follow-through, not the event. With no tracked currency pair in our coverage set and no high-impact events on the calendar in the next 30 days, the desk's directional call and the market's pricing of the Fed path itself are the only instruments in the trade.
What the desk is arguing
The desk's thesis is blunt: August CPI was hot enough to force a Fed hike next week, and Warsh will get the votes. This is framed as a one-off, not the start of a hiking cycle, but the near-term policy direction is unambiguous. ING's James Knightley is explicit that the Fed chair has the hawkish momentum from Jackson Hole and an FOMC majority behind him.
The evidence is the arithmetic of the trend rate. To pull headline inflation back to 2%, the US needs to average 0.17% MoM over time; core printed 0.290% MoM, versus 0.2% expected. The detail is broad enough to matter — energy +2.1% MoM with gasoline +3.9%, airline fares +2.7%, and education/communication +1.6% — while apparel, recreation, food and housing ran benign. Core PCE, the Fed's preferred gauge, is at 3.3% YoY, hotter than headline CPI.
The alternative read the desk is implicitly rejecting: that a 0.29% MoM core print is a residual-seasonality quirk and that the 0.4% headline is an energy-led head fake. ING's own language — "sticky," "too hot for comfort" — pre-emptively closes that door. In the desk's framing, 85% futures pricing isn't overpriced; if anything it's the floor.
How other firms see it
Without per-firm forecasts in our internal coverage, the cross-firm grouping is thin, but the question that matters for positioning is whether peers are pricing a hike-and-hold or a hike-and-hike. The desk's "one-off" framing is the consensus view among Fed watchers; any sell-side voice calling this the first of two would sit contrary to ING and needs to be watched as the tail scenario.
Where this intersects the FX tape: the USD complex is the cleanest expression, with EUR/USD and USD/JPY the natural first-order vehicles. The rate path also transmits into broader G10 positioning — a hawkish Fed against a still-cautious ECB keeps the dollar bid, and any repricing of the terminal rate will show up fastest in the front-end of the US curve and the 2-year yield, which is the signal to watch alongside the dollar index.
Key takeaways
- 01US August core CPI printed 0.290% MoM vs 0.2% expected — well above the 0.17% MoM trend needed for 2% inflation.
- 02Fed funds futures imply an 85% chance of a 25bp hike next week; ING fully expects it.
- 03Core PCE at 3.3% YoY is hotter than headline CPI, validating the hawkish Fed read.
- 04Warsh's Jackson Hole spin and an FOMC majority reportedly back the move; ING frames it as a one-off.
- 05No tracked FX pair in our coverage set and no high-impact events in the next 30 days — the Fed pricing is the trade.
Market implications
The cleanest signal is the 2-year US Treasury yield and the dollar index — a hawkish hike-and-hold is already ~85% priced, so the risk trade is any hawkish dot or Warsh language that extends the path beyond one meeting. Watch USD/JPY and EUR/USD as the first-order FX expressions.
Risks to this view
The call is invalidated if core CPI revisions strip out the 0.290% MoM print as seasonal noise, or if the FOMC delivers a hawkish cut/hold with dovish guidance that forces markets to reprice the path lower. A surprise soft payrolls or a sharp energy reversal before the meeting would also undercut the hike case.
Articles Sticky US inflation justifies a Fed rate hike Published 14:04 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US headline and core inflation came in well above the 0.17% month-on-month trend rate required to bring the annual rate down to the Federal Reserve's 2% target. Given Fed Chair Kevin Warsh's hawkish spin at Jackson Hole, he will be pushing for a rate hike next week and a majority on the FOMC will likely agree James Knightley US inflation is too high and we expect a one-off rate hike Inflation continues to trend too hot for comfort US August CPI has come in to match the 0.4% month-on-month and 3.4% year-on-year consensus expectation. However, the core inflation index (ex-food and energy) rose 0.3%/2.4%, which is hotter than the 0.2% MoM expected.
To three decimal places, it came in at 0.290% MoM. Remember, we need to average 0.17% MoM over time to bring the YoY inflation rate trending towards the Fed’s 2% target. This outcome has reinforced market expectations of Fed policy tightening next week, with Fed funds futures contracts implying an 85% chance of a 25bp rate hike – an outcome that we fully expect.
The chart below shows the MoM, 3M annualised and YoY rates of core inflation. The black line marks 0.17% MoM, which is what the blue bars need to trend at to bring annual inflation down to 2%. The details show energy prices rose 2.1% MoM, led by a 3.9% jump in gasoline prices.
Higher fuel costs pushed airline fares 2.7% higher while education and communication prices jumped 1.6%. On the opposite end, apparel, recreation, food and housing were all benign. We should also remember that the Fed's favoured inflation measure, the core personal consumption expenditure deflator, is running even hotter at 3.3% YoY.
Core US inflation metrics (MoM%, 3M annualised, YoY%) Source: Macrobond, ING "> Source: Macrobond, ING We expect a one-off hike With Kevin Warsh warning that inflation has been above target for too long in an environment where the economy is at full employment and financial conditions aren't restrictive, there should be a decent majority of FOMC members backing a hike. Markets don’t expect them to stop there, with Fed funds futures looking at potentially three further rate hikes over the next 12 months. We are not in that camp.
If we see an improvement in energy flows from the Strait of Hormuz in coming months, fears of a renewed upswing in inflation will likely be proved wrong. Weak wage growth and tariff refunds provide relief on corporate costs and the cooling housing market will continue to dampen the shelter component of inflation. We, instead, think this is merely a recalibration of Fed policy, similar to the hike implemented by Alan Greenspan’s Fed in 1997.
US 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 Inflation continues to trend too hot for comfort We expect a one-off hike
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