Fed Locked into Hawkish Stance as Inflation PersistsFedLockedintoHawkishStanceasInflationPersists

Inflationary pressures held strong in September with core consumer prices rising at the quickest pace in 40 years, setting the stage for the Federal Reserve to maintain its aggressive posture. The core consumer price index, which strips out food and energy prices, climbed 6.6% year-over-year. Headline inflation remained elevated at 8.2%, compared with 8.3% in August. In another sign of inflation’s persistence, the Atlanta Fed’s “sticky” CPI – a measure of prices that change slowly – hit its own four-decade high with an increase of 6.5%, up from 6.1%. The latest inflation figures prompted investors to reassess the path for rate hikes in the coming months. Interest rate futures are pricing in another increase of 75 basis points in November, with the odds of a smaller half-point hike falling since the CPI report was published last Thursday. Despite this, risk assets have rallied, propelled by corporate earnings that have weakened less than expected and a policy shift in the UK, where the government has withdrawn most of its planned tax cuts.

In its Weekly View from the Desk, PGIM Fixed Income notes that while Fed officials are raising some caution over the risk of tightening too much and too fast, they are likely locked into the current policy stance until inflation shows signs of rolling over. Meanwhile, a new paper from the Bureau of Labor Statistics examining how the agency uses rents in calculating CPI data may serve as a clue that inflationary pressure from the housing sector could soon fade.