- Core inflation expected to moderate in October

- Fed officials maintain hawkish tone

- Data scheduled for release Tuesday at 08:30 ET

By Harry Daniels

LiveSquawk News

@HarryDaniels71

Following last week’s stronger-than-expected employment report, attention turns to US October inflation data, arguably the more important release for Federal Reserve policymakers as they weigh their next monetary policy move.

The latest economists’ poll forecasts headline consumer prices to have risen 0.3% m/m in October, half September’s 0.6% increase. Core CPI, which excludes food and energy, is expected to rise 0.2%, a tenth of a percentage point below the previous reading.

The Bureau of Labor Statistics said it will not publish annual inflation figures for October because of the government shutdown during the same period last year.

This will be the final CPI report before the December FOMC meeting, with November’s figures scheduled for release a day after the rate decision.

Nonetheless, Citi’s Veronica Clark argued that, following two stronger core inflation readings in August and September, a more moderate October print was unlikely to substantially “move the needle on expectations for another rate hike in December.”

Headline inflation accelerated to 3.7% y/y in September from 3.4%, with prices rising 0.6% on the month. Much of the increase reflected higher energy costs, with gasoline prices jumping 9.1% m/m, accounting for more than half the monthly advance.

More concerning for policymakers was the persistence of underlying price pressures. Core CPI increased 2.6% y/y, exceeding expectations of 2.5% and August’s 2.4% reading.

Shelter costs rose 0.4% m/m, up from 0.3%, while food prices were unchanged. Food away from home increased 0.2%, partially offset by a 0.1% decline in food at home.

Analysts expect several components to display similar trends in October, particularly within the core measure.

“We expect monthly core inflation increases in Q4 to be modest,” Clark said. “Details of stronger August/September data were somewhat abnormal and not widespread enough to suggest persistently stronger inflation in our view, especially considering very soft core inflation just a few months before (flat core CPI in June).”

As for the implications for monetary policy, comments from voting and non-voting Fed officials since the October meeting have been predominantly hawkish.

Dallas Fed President Lorie Logan argued that the economic outlook warranted further tightening, saying there was a clear case for the FOMC to “implement at least two more 25-basis-point rate increases.”

Cleveland Fed President Beth Hammack was similarly hawkish, warning that inflation had moved in the wrong direction, with September headline PCE running at 3.6% y/y and core inflation at 3.1%.

“I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner,” she said.

Even New York Fed President John Williams, one of the less hawkish voices on the committee, acknowledged that inflation remained too high. However, he stopped short of signalling support for a December hike, preferring to assess further economic data.

Citi’s Clark suggested that financial markets, rather than a modest slowdown in inflation, could prove the bigger obstacle to another increase in borrowing costs.

“The main risk for Fed officials not following through on a December rate hike would be a further substantial correction in equity markets or widening credit spreads,” she said.

With nearly two-thirds of the FOMC's members scheduled to speak this week, attention will turn to whether recent financial market volatility has altered their assessment of the outlook.

Deutsche Bank senior US economist Brett Ryan suggested investors would be watching how officials incorporate tighter financial conditions into their policy views, and whether the Democrats’ sweeping victory in last week’s US midterm elections has materially changed their assessment of the economic and monetary policy outlook.