PARIS: Inflation rose 0.2% year on year, up from 0.1% in September, with the core rate of inflation – which strips out food and energy – unchanged at 1.9% year on year.
Ultimately, the inflation numbers do nothing to dampen speculation that the Fed is limbering up to hike rates for the first time since June 2006 at its FOMC meeting next month.
Rob Carnell at ING Bank suggested there was the prospect not only of a rise in December but the chance of further increases shortly after:
By February next year, there should be very little drag on headline inflation from oil/energy prices, unless we see a considerable further decline in oil from its already depressed levels. And as we approach this point, we should see headline inflation rapidly begin to close in on these higher core figures.
This of course raises the prospect that if the Fed does indeed raise rates in December, as we and the market now believes likely, and if the October hourly wages growth increase was not a one off, then the Fed is going to come under rising pressure to consider a further March hike in addition to any December increase.
We believe that the Fed will want to stick to its “cautious” approach to normalising rates, but if this conflicts with a buoyant activity and broad price picture, then longer dated bond yields are going to come under upward pressure, with the Fed having to fight any tendency for the dollar to appreciate by keeping policy rate expectations capped.
