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Federal Reserve Expected to Hike Rates Amid Persistent Inflation
Confirmed
In Short: The latest Worldpanel by Numerator data showed that grocery price inflation accelerated to 2.3% YoY in the four weeks to September 6, from 2.1% in the previous report, indicating a growing concern over persistent inflationary pressures.
The UK Consumer Price Index is expected to rise 3.1% YoY in August, up from 2.9% in July, moving further away from the Bank of England’s 2% target, while core inflation, which excludes volatile components, is also expected to accelerate to 2.7% YoY from 2.6% previously.
A simultaneous increase in headline and core inflation could fuel concerns at the BoE about persistent price pressure, especially as the consequences of the conflict in the Middle East continue to feed through to UK energy costs.
The central bank is expected to keep its policy rate unchanged at 3.75% on Thursday, but another acceleration in price pressure could strengthen expectations of an interest rate hike in the coming months, as the inflation report could trigger volatility in the British Pound (GBP).
What's confirmed
- The UK Consumer Price Index is expected to rise 3.1% YoY in August, up from 2.9% in July, moving further away from the Bank of England’s 2% target, while core inflation, which excludes volatile components, is also expected to accelerate to 2.7% YoY from 2.6% previously.
- A simultaneous increase in headline and core inflation could fuel concerns at the BoE about persistent price pressure, especially as the consequences of the conflict in the Middle East continue to feed through to UK energy costs.
- The central bank is expected to keep its policy rate unchanged at 3.75% on Thursday, but another acceleration in price pressure could strengthen expectations of an interest rate hike in the coming months, as the inflation report could trigger volatility in the British Pound (GBP).
What's still developing
- The latest Worldpanel by Numerator data showed that grocery price inflation accelerated to 2.3% YoY in the four weeks to September 6, from 2.1% in the previous report.
- According to Morningstar, interest rate markets see a potential first BoE rate hike as early as November and are pricing in three increases by mid-2027.
- The key debate for the BoE, however, remains whether the energy shock is generating more persistent second-round inflation effects.
- Such a surprise would reinforce concerns that energy-related pressures are beginning to spread more broadly through the economy and could increase the likelihood of a rate hike in the coming months.
- Vanguard senior economist Josh Hirt said on Friday that the Federal Reserve leaving interest rates unchanged at its September meeting could push Treasury yields higher.
- The Federal Reserve is holding a closely watched monetary policy meeting this week as the market expects the central bank to hike interest rates amid concerns about stubborn inflation.
- The anticipated rate hike comes as yields on U.S. Treasurys are rising, reaching the highest level in years amid competition in the fixed income market from foreign sovereign debt and corporate debt issuance.
- Wednesday's FOMC announcement will also include the so-called "dot plot" that outlines how Fed policymakers view the future path of interest rates.