US inflation drop driven mainly by soft global prices; Next rate hike to stay near 50 bps

The US CPI inflation for the month of October belied street estimates, coming in at 7.7 per cent instead of the widely expected 8%. The 50 basis points dip in October compared to 8.2% of the previous month was due to the softening of the global commodity prices, as well as the base effect, according to economists. The inflation rate of October hints at a downward trend in the longer term, but the transitory view does not rule out an uptick in the coming few months.

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Slow demand, soft commodity prices pulled down inflation rate; still far above comfort levels

“The US inflation print for October came in better than expected. There already was indication that the inflation will be easing but obviously the extent of easing has been more than expected. A big factor playing in this easing of the inflation rate is the softening of global commodity prices, with perhaps a slight exception of oil. Having said that, it still remains pretty elevated and will take a long time before it comes into the Fed’s comfort zone,” said Sujan Hajra, chief economist, Anand Rathi Securities. He added that the downward trend in the inflation rate is more of a long-term view, rather than a short-term outlook.

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Rapid rate hike, base effect to contribute to the downside

“The US has seen one of the sharpest rate hike cycles in decades. Therefore, it is a matter of fact that demand destruction happens. On a broad basis, it is not a surprise that the inflation has started to come off since the base effect will also play out in the coming months. In my opinion, you will see inflation coming further down, but that said, on a sequential basis, the momentum is still very high for one to assume that we have won the battle of inflation,” said Madhavi Arora, lead economist, Emkay Global Financial Services. She added, “There is still a long way to go. The downside of the inflation is not going to be very linear due to some sticky elements which will take some time to reverse.”

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Path ahead for US Federal Reserve

According to Hajra, seeing the latest inflation print, it is very unlikely for the US Fed to go for another 75 bps interest rate hike. “One can be certain that the rate hike will be 50 bps or lower,” Hajra said. “It is difficult to know where the terminal rate would end. At present, the market is comfortable at 5 per cent, which means that the upcoming policy will see a 50 bps rate hike, however, incrementally, the hikes will be lower,” said Arora.