Despite the belief of many markets, the recent softer-than-expected October consumer-price data may not be the game changer for inflation, according to some hawkish economists. The inflation data led to a significant boost in stocks, including DJIA and SPX, while causing a sharp drop in the 10-year Treasury note (BX:TMUBMUSD10Y).
Chief economist at Santander US, Stephen Stanley, pointed out that monthly inflation readings are heavily influenced by volatile service-sector industries such as housing, hotels, and used cars. In September, these sectors performed stronger than anticipated, while in October, their performance was softer. Despite these fluctuations, Stanley suggests that the underlying trend of inflation remains within the range of 3.5% to 4%.
During an interview, Stanley commented on the October data. He mentioned that while tuition inflation remained flat, recreation costs saw a minor increase of 0.1%. In light of these observations, Stanley believes that the Federal Reserve has room to keep interest rates steady during its December meeting. Furthermore, he states that the longer the Fed maintains this position, the less likely it is for any further rate hikes to take place. The most recent rate hike occurred in late July.
Traders active in derivative markets have already expressed their doubts about a potential Fed rate hike in December after observing the soft October inflation print. Due to this shift in market sentiment, Stanley has revised his previous expectation of one more rate hike and now predicts no more tightening.
However, Chief economist at Mizuho Americas, Steven Ricchiuto, disagrees with the notion that the Fed is finished with hiking rates. In an interview, Ricchiuto criticizes the market for prematurely assuming the Fed’s stance. He argues that although the numbers are satisfactory, they are not sufficient to justify 100 basis points of rate cuts next year. Ricchiuto asserts that the Fed will only ease up on rates once it is fully convinced that inflation will meet its target. He concludes his statement by emphasizing that core inflation remains at a 4% annual rate, suggesting that the desired goal has not been reached yet.
Ricchiuto believes that, for now, the Fed is on hold. However, he does not view this as a permanent decision. He points out that the strong labor market should not be overlooked, as it will have a crucial impact on the underlying stickiness of inflation.
In summary, economists have varying views on the significance of the October consumer-price data in relation to inflation. While some believe it may not be as impactful as initially thought, others argue that it is too soon to conclude that the Fed is finished with rate hikes. The market’s response highlights the uncertainty surrounding future interest rate decisions.