(Bloomberg) — A monthly report on US consumer prices due Thursday is set to muddy the picture for Federal Reserve officials trying to decide whether to hike interest rates again, especially as escalating conflict in the Middle East adds uncertainty, according to Bloomberg Economics.
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The consumer price index will probably show that headline inflation moderated in September. But core inflation — which excludes food and energy categories — likely crept up to between 3% and 4% on an annualized basis, thanks to a jump in used-car prices, Bloomberg economists Anna Wong and Stuart Paul wrote Wednesday in a preview of the release.
“If the risks between inflation and growth have become more balanced in the past few months, the Israel-Hamas conflict has now tipped the balance once again toward upside inflation risks – just as pandemic supply bottlenecks have subsided,” Wong and Paul said.
“Our baseline is for the Fed to hold rates steady for the rest of the year, but we see non-negligible risks of another rate hike, something the market is probably underpricing.”
Read More: US PREVIEW: September CPI to Sow Doubt About Fed Rate Course
Slowing core inflation over the summer had raised hopes that the Fed would cease rate increases after lifting the target range for its benchmark in July to 5.25% to 5.5%. But high gasoline prices pushed the August reading up 0.6% from the prior month — the most since inflation peaked at a four-decade high in June 2022 — and core CPI accelerated on a monthly basis for the first time since May.
Here’s what the Bloomberg economists expect:
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Year-over-year CPI inflation will fall to 3.6% from 3.7%, with annual core inflation decreasing to 4.1% from 4.3% prior.
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Goods inflation driven by used-car prices will be biggest contributor to the core CPI climb, reversing a three-month trend of negative readings.
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Inflation will remain sticky in some core services categories, such as car insurance, and physician and hospital services.
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There will be some good news on rents, however. Bloomberg Economics estimates the inflation of primary residential rents moderated to 0.4% from 0.5% and owner-equivalent rent inflation held steady at 0.4%.
Wong and Paul warned increasing tensions in the Middle East may spur supply shocks and boost energy prices. If oil prices reach $100 a barrel, for example, headline CPI inflation could reach 4% by the end of this year, the economists said.
“As long as inflation expectations appear to be anchored, the Fed likely will look through the price increase,” Wong and Paul wrote. “However, a sustained and larger oil shock could increase the risk that inflation expectations un-anchor, ultimately pushing the Fed to continue hiking rates.”
Read More: Used Cars, Airfares Risk Slowing US Inflation’s Future Descent
Their predictions for the September report are in line with median estimates in a Bloomberg survey of outside forecasters.
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