The Fed will look through any rise in headline inflation resulting from the recent jump in crude oil prices, but the acceleration in core CPI inflation, to an 11-year high in August, is harder to ignore. (See Chart 1.) Tariffs on Chinese imports explain part of that increase, but they have been far from the only factor, with prices for used vehicles, apparel, airfares and health insurance rising markedly in recent months. Even allowing for some further upward pressure from the next round of China tariffs, steady growth in unit labour costs suggests that the rise in core inflation won’t continue for much longer. We also doubt it will stop the Fed from following up a likely rate cut this month with a final 25bp cut in December if, as we expect, economic growth slows further. Nevertheless, it reinforces our view that the markets are still pricing in more cuts over the next 12 months or so than the Fed is likely to deliver.
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