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Flat US inflation could spell the end of rate hikes

5 minute read

The headline consumer price index in the US held steady during October.

The US consumer price index (CPI) was unchanged in October, setting the stage for the US Federal Reserve to keep rates on hold and begin cutting earlier than previously expected.

On an annual basis, the headline CPI increased by 3.2 per cent, down from 3.7 per cent in September. Economists had forecast a monthly lift of 0.1 per cent and an annual lift of 3.3 per cent. Core inflation rose by 0.2 per cent month on month and 4 per cent year on year.

Australia lags behind other nations, such as the US, in its inflationary trajectory, navigating economic challenges with a delayed pace compared to its global counterparts. But the latest data from the US is good news for the local economy, an economist has said.


“US inflation led Australian inflation on the way up and is doing so too on the way down, so its ongoing fall as seen in October points to a further fall in Australian inflation ahead,” commented AMP chief economist Shane Oliver.

“Just as it adds to confidence that the Fed is at or near the top on interest rates, it also adds to confidence that the RBA is at or near the top on rates too. But the sting in the tail is that US services inflation is still somewhat sticky and we are seeing that too in Australia which will keep both central banks ‘high for longer’ on interest rates.”

Reacting to the US CPI on Wednesday, ANZ economist Madeline Dunk, said: “The data helped to crush expectations that the FOMC will raise rates again and Fed fund futures are now pricing no further US rate hikes in this cycle.”

“The probability of a rate hike in December and January is now zero and the first rate cut is priced for May as opposed to July yesterday. Increasingly, it looks as if the level of monetary restraint is having the desired outcome on both inflation and the labour market.”

One more inflation print covering the month of November will be released prior to the Fed’s final meeting of the year on 13 December. Earlier this month, Fed chair Jerome Powell said there was still a “long way to go” in bringing inflation back to target.

“The FOMC is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time; we are not confident that we have achieved such a stance,” he said.

“We know that ongoing progress toward our 2 per cent goal is not assured: inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

Locally, the RBA is bracing for a potentially “bumpy” road ahead as progress towards bringing down inflation draws out.

Speaking at the UBS Australasia Conference this week, RBA acting assistant governor (economic) Marion Kohler noted that the decline in inflation seen to date has been driven by lower goods price inflation since issues in global supply chains have improved.

“However, inflation is still too high and underlying inflation is higher than expected a year ago. This reflects strong domestic cost pressures and a still-robust level of aggregate demand,” she said.

“Prices of many services have been rising briskly in Australia. I also want to note that services price inflation has been slow to decline in many other economies.”

In annual terms, headline inflation declined to 5.4 per cent in the September quarter, down from a peak of 7.8 per cent in the December quarter of 2022.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.