Christopher Hodge, chief U.S. economist at Natixis, analyzed that the U.S. October CPI data, to be released at 21:30 Beijing time on Tuesday (November 10), is likely to meet market expectations, with inflationary pressures easing slightly. While there are no signs of renewed inflation acceleration, there is still a long and bumpy road to the Fed's 2% inflation target, and inflation stickiness will continue to constrain the pace of monetary policy shifts.

Institutions predict that the CPI will stabilize and decline, with housing and diesel fuel being the main drivers of the slowdown.

In his CPI outlook report for the bank, Hodge stated that the current inflation data is unlikely to contain any surprises. He said, "We expect inflation to slow slightly in October compared to September, marking the beginning of a period of weaker inflation data. Core CPI is expected to rise by approximately 0.22% month-on-month, while overall CPI is expected to rise by 0.29% month-on-month. Due to the government shutdown last year, the official inflation year-on-year reading will not be released . If the data meets the forecast, the three-month annualized inflation rate will remain at 3.4%, and the six-month annualized inflation rate will fall back to 2.5%." He added that the slowdown in core CPI mainly comes from the correction in the housing component, with landlords' equivalent rent and out-of-town accommodation prices being the main drags. At the same time, the stabilization of diesel prices will also help alleviate the price pressure on high-energy-consuming goods, jointly contributing to a cooling of prices.

Meeting inflation targets is unlikely to change the hawkish tone; a prolonged pause may follow the December rate hike.

Even if CPI weakens as expected, it remains significantly below the Fed's 2% target, making another rate hike this year highly likely. Hodge stated that persistently high inflation, a stable labor market, and the employment recovery signals from the October non-farm payroll report justify a December rate hike. He wrote in his report that after this rate hike, the Fed will likely enter a prolonged period of policy observation. Fed Chairman Kevin Warsh commented that the September rate hike reduced some of the easing measures, while subsequent asset market volatility further tightened market conditions. Against this backdrop, after the December rate hike, the Fed will likely pause rate hikes to observe subsequent economic developments.

Wage increases pose limited risk of inflation, and financial conditions constrain excessive contraction.

Hodge further explained that while the labor market is resilient, it has not yet generated the momentum to sustain inflation. Supply-side price pressures will gradually subside, and the overall financial environment is moving towards a neutral level. Downward headwinds to economic growth are increasing, and financial market vulnerability has risen. He said that if the subsequent decline in inflation aligns with institutional forecasts, the Federal Reserve will carefully control the pace of tightening, deliberately avoiding excessive tightening that could severely damage the economy and markets. In other words, this round of interest rate hikes will not continue indefinitely. After the final rate hike in December, the policy focus will shift from continuous tightening to a wait-and-see approach, relying on already raised interest rates to gradually digest existing inflationary pressures.

Conclusion

The CPI is likely to see a moderate decline this time, which is a positive sign of improving inflation. However, inflation stickiness has not been eradicated, and the process of returning to the 2% target will not be smooth sailing. The baseline scenario for institutions predicts that the Federal Reserve will raise interest rates in December, followed by a long policy pause. The pace of subsequent inflation decline and the stability of financial markets will determine how long interest rates remain high.