Natixis: September Rate Hike Could Be the Only One in the Cycle as Core Inflation Eases

Two economists at Natixis estimated that core inflation in the United States will reach 0.19 percent in September, and headline inflation 0.6 percent, in a reading they consider a path gradually heading toward moderation. Christopher Hodge and Selin Aker said in Natixis' October inflation report that August's hot reading came in higher than market expectations due to components they do not believe will be repeated.

The two economists expect year-on-year core inflation to remain stable at 2.4 percent, the annualized three-month rate to rise to 2.8 percent as July's negative reading drops out of the calculation, and the six-month rate to fall to 2.55 percent. They believe that the acceleration in headline inflation is mainly driven by energy and food rather than being broad-based, and that supply pressures are not being broadly transmitted to core prices.

The report noted that Fed Chair Kevin Warsh is monitoring alternative inflation metrics, including the trimmed mean and median, in addition to the breadth of increases, meaning the percentage of sub-components exceeding 3 percent, metrics that Natixis believes show an improving trend without yet returning to the Fed's 2 percent target.

Hodge and Aker believe that it is "quite possible" that the September rate hike will be the only increase in the current cycle, which is unusual because the Fed typically hikes multiple times to curb inflation. They expect a pause at the late-October meeting to allow time to assess the data and avoid political fallout ahead of the midterm elections in early November, with a subsequent move likely in December or January.

What Do These Terms Mean?

Consumer Price Index (CPI): A monthly measure of the change in prices for a basket of goods and services purchased by the American consumer, used to measure the pace of inflation.

Core Inflation: Inflation excluding the more volatile food and energy prices, used by the Fed to gauge the true trend of prices.

Trimmed Mean: A metric that ignores the highest and lowest readings and then calculates the average, to reduce the impact of anomalous months on the inflation reading.

Rate Hike Cycle: The period during which the central bank raises interest rates several consecutive times to curb inflation, typically ending with the first decision to hold rates steady.