Consumer inflation expected to be strong in September, supported by rents

Due to higher rental costs, consumer inflation is expected to remain hot in September but slightly below the pace of August.

The closely watched CPI was released on Wednesday at 8:30 AM ET, an important inflation report ahead of the Federal Reserve’s next interest rate decision in early November. The Fed is widely expected to take another move in curbing inflation, with a three-quarter point rate hike on November 2.

Economists expect CPI to rise 0.3% in September, up from 0.1% in August, According to Dow Jones. This means that inflation has been running at an annualized pace of 8.1%, down from 8.3%.

Excluding food and energy, CPI is expected to have risen 0.4%, down from 0.6% in August. But the annual rate of core inflation of 6.5% is expected to be higher than the 6.3% recorded in August, due to the underlying effects.

“Core inflation is going to be higher, so in many ways inflation still hasn’t peaked. There are still more risks of supply-side shocks,” said Diane Sonk, chief economist at KPMG.

She added that energy costs are expected to fall again but may rise later. OPEC+ said it will cut crude oil production by 2 million barrels per day. She also expects in the coming months to see some impact from Hurricane Ian.

By November and December, prices in some categories may be affected by the hurricane as Florida residents replace cars and repair or rebuild homes that Ian destroyed on his journey through the Southeast. This can increase the costs of building materials, the prices of new and used cars, and the cost of everything from appliances to home furnishing.

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Bank of America expects commodities to rise 0.2% in September, down from 0.5% in August. Services are expected to rise 0.5%, driven by shelter costs, which account for 40% of the CPI. Economists at Bank of America expect food prices to rise 0.7%, slightly slower than their 0.8% gain in August. After dropping 5% in August, energy costs are expected to fall another 3.5%.

Economists expect service inflation to continue rising in September, due to higher wages and a labor shortage. Prices are expected to be higher for rentals and all shelter, including hotels. Education costs are expected to rise with the reopening of schools and nurseries, and higher costs for medical services have also been observed. Prices for airline tickets and car insurance are also expected to rise, but used car prices are often expected to fall.

“Every month that commodities do not fall is a sign that demand is outstripping supply,” said Michael Gabin, chief US economist at Bank of America. “That means the Fed has to dampen demand more than it might want to.”

Economists at Goldman Sachs expect rent inflation to remain elevated in September, at 0.7% month over month. This level corresponds to the three-month trend.

While the trend in CPI shelter costs has been moving upward, it is lagging behind the actual rental market. Goldman economists see the potential for a slowdown in housing-related inflation.

The economists wrote: “Rental demand for new leases has slowed sharply, and the increase in multi-family construction combined with a marked decline in rental demand points to a further slowdown.” “We expect housing inflation to slow to a monthly pace of 0.4-0.5% by the end of the year and peak at around 7% year-on-year early next year.”

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Intense focus on inflation

Market focus on CPI is intense as it is a key input to the Fed. past weeks Strong jobs report for the month of September It gave little hope to investors that the Fed might slow interest rate hikes.

“I don’t think the employment report gave them much reason to stand up in terms of changing their tone,” Gaben said.

The Federal Reserve has raised the federal funds rate range to 3% to 3.25% since March, when it was zero to 0.25%. Economists expect the Fed to raise interest rates by at least another full percentage point before the end of the year.

“If the CPI comes out strong, the markets will sell. Stocks won’t like that,” Gaben said. “If it drops a little bit, they will say the labor market is still strong, and they will go up 75 [basis points]“Unless the report is a major downside error, markets will expect a three-quarter point rate hike,” he said.

“Inflation has proven difficult to predict, and given the negative ‘shock’ from the August CPI (9/13), it would be difficult for any investor to have the conviction to go into this report,” wrote Tom Lee, founder of Fundstrat.

Lee noted that the hotter-than-expected inflation reports in December, January and August prompted significant declines in the stock market when they were released. However, improved reporting from February, June and July had the opposite effect.

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