Inflation Heats Up, But Economists Stand Firm On Fed Interest Rates: Dollar Gears Up To Break 6-Day Losing Streak

U.S. inflation is continuing to defy expectations, causing heightened concern among investors who doubt that the Federal Reserve will end its rate-hiking cycle.

In September, the Consumer Price Index (CPI) rose by 3.7% year-on-year, mirroring August’s figure but surpassing the anticipated 3.6%. The core CPI index met the projected figures.

Nevertheless, economists largely appear to be leaning towards the notion that the Federal Reserve will maintain the current interest rates in November.

Economists React To A Higher-Than-Expected September CPI Report

According to Jeffrey Roach, the chief economist at LPL Financial, core inflation, excluding shelter costs, is showing less resistance compared to the levels observed in the past year or earlier this year. While market expectations for the upcoming November Federal Reserve meeting remain unchanged, investors should pay close attention to oil prices, as they may offer valuable insights into the Fed’s actions in their December meeting.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, suggests the Federal Reserve’s decision to raise rates on Nov. 1 is a toss-up. This uncertainty stems from higher-than-expected job numbers on Oct. 6 and recent inflation data exceeding expectations. The Fed appears to be grappling with the dilemma of avoiding excessive tightening, as evidenced by the balanced risks outlined in their recent minutes.

Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, emphasizes the challenges in the final stage of combatting inflation. Core service inflation remains a concern, and the potential spillover of higher energy prices into core CPI adds complexity to the situation.

Andreas Steno Larsen, the founder and CEO of Steno Research, offers a contrarian perspective, diverging from the consensus view. Larsen contends overall inflation is running too high, with some categories experiencing an acceleration. He underscores the notion the Federal Reserve still has work to do in this regard.

Joseph Brusuelas, principal and chief economist at RSM US LLP, highlights shelter, and in particular owner equivalent rate (OER), is the primary driver of inflation. He anticipates a significant easing of this factor in the near future as real-time data suggests lower costs, which should eventually be reflected in official data.

Charlie Ripley, senior investment strategist at Allianz Investment Management, believes the latest Consumer Price Index (CPI) data doesn’t provide strong motivation for the Fed to take immediate action at the Nov. 1 meeting, as the inflation figure gradually moving closer to the Fed’s target of 2 percent.

Market Reactions To The CPI Report: Dollar Rallies

Although the market-implied interest rate probabilities remained relatively steady after the release of the CPI data, with a 90% probability of the Fed keeping rates on hold, the U.S. dollar surged. This upward movement has put the dollar on course to break a six-day losing streak.

Stocks headed lower, with the SPDR S&P 500 ETF Trust SPY trading slightly negative at 10:40 a.m. ET, after four straight days of gains.

Nine out of 11 sectors traded in the red Thursday, with the sole exception of the Energy Select Sector SPDR Fund XLE, up 0.6%, and the Technology Select Sector SPDR Fund XLK, up 0.8%. The Utilities Select Sector SPDR Fund XLU and the Consumer Staples Select Sector SPDR Fund XLP were the laggards, both down 1.4%.