Eugene Investment & Securities "December FOMC, 'Big Step' Expected"

[Asia Economy Reporter Hwang Yoon-joo] Eugene Investment & Securities forecasted that the Federal Open Market Committee (FOMC) will raise the benchmark interest rate by 0.50 percentage points in December. This is due to the recent U.S. October Consumer Price Index (CPI) slowing down more than market expectations.

Lee Jung-hoon, a researcher at Eugene Investment & Securities, stated, "Federal Reserve (Fed) Chair Jerome Powell previously said, 'Now, the final interest rate level is more important than the pace of hikes,' and it seems the concern that the FOMC will have to raise the final rate above 5% has somewhat diminished."

The U.S. October CPI and core CPI rose by +7.7% and +6.3% year-on-year, respectively. These figures were both below the expected values (CPI +7.9%, core CPI +6.5%). Energy prices increased by +1.8% compared to the previous month, returning to an upward trend after four months.

However, the overall price increases for other items such as food (+0.8% → +0.6%), new cars (+0.7% → +0.4%), used cars (-1.1% → -2.0%), and medical services (+1.0% → -0.6%) slowed down.

The researcher said, "Above all, rent, which was the main cause of the core CPI increase, slightly slowed from +0.8% to +0.7%," adding, "Although the risk of rising oil prices in winter remains, considering the movements of leading indicators of inflation, the slowdown in inflation is expected to continue."

The issue is the speed of the slowdown. The researcher predicted that after the first quarter of next year, when the rent increase is expected to slow significantly, the month-on-month increase rate of core prices will fall to around +0.3%.

He diagnosed, "Although this is higher than the historical average of +0.2%, inflation could drop significantly by the end of the second quarter next year due to base effects. The recent inflation report has clarified the direction of a peak-out in inflation."

He continued, "Although there is still a large gap from the 2% target, the effects of tightening are gradually appearing in both prices and employment."