Economists at Natixis analyzed that the higher-than-expected US September CPI data proves that the surge in August inflation was not a one-off anomaly, bringing the possibility of a Fed rate hike in October back on the table. This inflation review report breaks down the internal structure of this inflation surge in detail. While institutions remain confident in a medium- to long-term decline in US inflation, widespread upward pressure on prices has shaken previous optimistic assessments. With the midterm elections approaching, policymakers need to balance combating inflation with political implications, transforming the October policy meeting from a wait-and-see approach into a "dynamic meeting" with the possibility of a rate hike.

Inflation emerged in multiple areas in September, with energy and housing being the main drivers.

In their CPI review report, Natixis economists Christopher Hodge and Selin Aker stated that September's inflation exceeded expectations, and the price increases were widespread, raising concerns that the brief summer dip in inflation might be short-lived. Prices for entertainment, education, and communication products rose significantly in September, driving a 0.25% month-on-month increase in core goods and services; higher rents and hotel prices led to a 0.37% month-on-month increase in the housing sub-index. The supercore inflation indicator, excluding housing and other items, cooled somewhat, recording a 0.42% month-on-month increase, lower than August's level. Driven by energy prices, the overall CPI rose 0.6% month-on-month, with gasoline prices surging 9.1% compared to the previous month's 3.9%, accounting for more than half of the total price increase this month.

Inflation data reshapes market narrative; October meeting becomes the focus.

Two economists noted that even though August's inflation data fell short of expectations, they remained optimistic about a downward trend in US inflation. However, the widespread pressure on various prices in September significantly impacted this confidence. Previously, institutions judged that as long as the CPI was close to market expectations, it would be difficult to change the Fed's assessment of October's policy. This time, the data significantly deviated from expectations, enough to trigger intense market debate regarding interest rate hikes. Fed Chairman Kevin Warsh has stated that he welcomes the flexibility of policy choices at the FOMC meetings, and the current data will truly put the October meeting into a dynamic game. Inflation is no longer a localized disturbance but is spreading in multiple areas, directly providing hawkish officials with more arguments. The risk of persistent inflation has returned to the market's focus, and trading funds are beginning to repric the probability of an October rate hike. Changes in interest rate market pricing will, in turn, affect the Fed's policy choices.

Policy trade-offs: It is recommended to pause interest rate hikes in October and wait for a reassessment in December.

Hodge and Acker stated that from a strategic perspective, pausing rate hikes in October would be a more prudent choice. If the Fed chooses to pause, it can gain more time to observe various economic indicators and then comprehensively assess the situation at the December meeting. This would also avoid the political negative impact of raising rates before the midterm elections in early November. The two economists predict that the Fed will most likely maintain interest rates at the October meeting. However, the better-than-expected September CPI provided strong support for the hawkish camp. If the market continues to price in a rate hike in October, the Federal Open Market Committee (FOMC) is unwilling to make a surprising decision to maintain rates, avoiding significant market volatility. This means that even if rate hikes are ultimately paused, the overall tone of the decision will still retain a strong tightening bias.

Conclusion

In summary, the higher-than-expected September CPI has shattered the market's assessment that the August inflation surge was merely a short-term anomaly, making the Fed's October rate hike a core topic of discussion again. This round of inflation was driven by multiple sectors including gasoline, housing, and entertainment, increasing the risk of inflation spreading. Natixis still believes the Fed is likely to pause rate hikes in October, allowing a window of observation to avoid the political impact of the election. However, the significantly stronger inflation data has enhanced the influence of hawkish voices; if the market continues to price in rate hike expectations, the Fed will be more cautious in its policy statements. Going forward, the market will closely watch the speeches of Fed officials for clues regarding the October interest rate decision.