Fed's Watchful Eye on Inflation Expectations Amid Rising Energy Prices

Fed to focus on core, but sustained higher energy prices could jeopardize inflation expectations:

A jump in gasoline prices over August should drive headline CPI to its highest m/m print since June 2022’s blowout 1.2% gain. Given our house forecast for WTI oil at USD77/barrel by year-end and USD81/barrel by end-2024, we do not envisage significant further upside in gasoline prices. That said, Fed officials will keep close watch on inflation expectations amid energy- and gasoline-price increases. As Powell has stated in the past, as long as inflation remains high, price expectations remain at risk. At the moment, medium- and longer-run inflation expectations have generally stayed anchored, albeit at the upper ends of their recent ranges.

 

Risks tilted to upside on less scope for “revenge spending” price declines:

Of 61 forecasts for August CPI, 45 economists expect a core print of 0.2% m/m, versus 14 at 0.3% and 1 each for 0.1% and 0.4%. We agree that the risks to the core forecast likely tilt to the upside – indeed, our core CPI forecast on an unrounded basis stands at 0.24% m/m. The skew of risks in our view comes by virtue of less scope for downside from several “revenge spending” categories that comprise non-housing services. For example, we think it is unlikely that airfares will post a third consecutive 8% m/m decline, particularly with jet fuel prices increasing for the month (indeed, we pencil in a small rise here)

 

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