Samuel Rines write in a Macro Note:
If the Fed is looking for excuses to tighten monetary policy further, this is not the CPI report it wanted to see,but the internals point toward further deceleration in both the headline and core. •
The fundamental story is rather simple: core commodities were less deflationary, and core services less inflationary and that is not the dynamic the Fed wants to see at this point. Services prices are sticky, less volatile, and less cyclical.
The data points toward inflation weakening through the end of 2018 and into 2019.
The underlying inflation dynamics do not point to further strength. It is worth noting that any acceleration in core goods inflation is easily overwhelmed by a deterioration in core services. Core
goods represent only roughly 25% of the core inflation weight. Core services prices are sticky, less volatile, and less cyclical – better for making policy decisions.
There are a few reasons this inflation report will matter for markets and the Fed. It will be difficult for the Fed to back-off its hiking plans in December. But it should cause the Fed to rethink its 2019 plans. The composition of the Fed’s FOMC voters changes yearly, and it already appears to be slightly more dovish in 2019. With inflation pressures tepid and likely waning, the Fed will be hardpressed to justify tightening significantly further. The Fed will be loath to back away from its current posture. But the data is the data, and it can be inconvenient at times.
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