US core PCE Deflator (Oct) – 30/11 – when the October CPI numbers were released a couple of weeks ago and saw headline CPI slow to 3.2%, and core prices slow from 4.2% to 4.1%, bets on another Fed rate hike in December were pared back sharply.
What was particularly noteworthy was a similar slowdown in super core inflation which the Fed pays close attention to and could well translate into a similar slowdown in this week's core PCE deflator numbers.If we see a similar trend playout in the core PCE deflator numbers that we saw in the headline CPI and PPI numbers, then it will become increasingly difficult for Fed officials to push back on the idea that rate cuts are coming in the middle part of next year.
In September PCE core deflator slowed to 3.7% its lowest level in 2 years and this week's October numbers are expected to slow further to 3.5%. This is likely to be the Fed's next key challenge in the face of slowing inflation, that is reining in market expectations of rate cuts and reinforcing the higher for longer mantra that has tightened financial conditions this past few months.