Oil Prices Surge To Three-Year Highs After Hurricanes And Unexpected Demand—How Much Higher Can They Go?With upcoming inflation numbers ahead of the November decision, lower is better. However, the Fed will tend to look past swings in energy costs driving the headline numbers to determine underlying trends in prices for goods and services such as housing, food, transportation and medical care.
The potentially good news is that the final quarter of 2021 did see some very high U.S. inflation numbers. If these figures drop out of the inflation 12-month series in late 2022 and early 2023, and are replaced by lower month-on-month totals, the overall annual inflation number may also fall fairly sharply. That may provide a bit of air cover for the Fed to ease off on rate hikes in 2023.However, despite the worrying headlines, fixed income markets may be guardedly optimistic on inflation.
December is far enough away that the Fed might change the plan a little here, just as September expectations nudged up from 0.5 to a 0.75 percentage point hike as the meeting neared. There’s some chance the Fed delivers a larger hike than anticipated if the inflation data in the run-up to the meeting doesn’t over any encouraging signals that price rises are starting to ease.
However, inflation data will be very closely watched and determine the Fed’s playbook into 2023. In the final meetings of 2022, unless there are dramatic surprises, the thing to monitor will be hints from Powell and others as to how things may play out in 2023.
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