US and Eurozone Core Inflation Declines... Is the Tightening Over?

Core PCE in the US and Core CPI in the Eurozone to be Released on the 29th
Oil Price Surge as a Variable... Prolonged High Interest Rate Outlook

As core inflation in the US and the Eurozone is expected to slow down, Wall Street has projected that the US Federal Reserve's (Fed) interest rate hikes have come to an end.

According to major foreign media on the 29th, the US and the Eurozone will respectively release the August core Personal Consumption Expenditures (PCE) price index and the September core Consumer Price Index (CPI) on the 30th Korea time (29th local time).

Bloomberg forecasted that the US August core PCE price index will record a 3.9% increase year-on-year. If the core PCE price index, a key indicator closely watched by the Fed, falls below the 4% range, it will be the first time in about 23 months since September 2021. Anna Wong, Chief Economist at Bloomberg Economics, said, "Although imports and spending have increased considerably, the August PCE price index likely slowed for the third consecutive month toward the Fed's target of 2%."

[Image source=Reuters Yonhap News]

Core inflation excludes volatile food and energy prices and reflects the underlying trend of inflation. In particular, if the US core PCE price index falls to the 3% range, there is speculation on Wall Street that the Fed may shift its policy focus to maintaining the current high interest rates rather than further tightening within the year.

Global investment bank Morgan Stanley believes the Fed's tightening cycle has ended. Ellen Zentner, Morgan Stanley's Chief US Economist, recently told Bloomberg in an interview, "I have a strong view that they (the Fed) have ended tightening here." She added that as inflation cools, the Fed is likely to maintain current rates until preparations for rate cuts next year are in place.

Bloomberg also expects the Eurozone's September core CPI to slow to 4.8%. If the actual increase matches this figure, it will be the lowest level in 12 months.

The market already believes that the European Central Bank (ECB) has ended its tightening. After the ECB raised its key interest rate by 0.25 percentage points to 4.5% on the 15th, ECB President Christine Lagarde stated, "If the key interest rate is maintained at the current level for a sufficiently long period, it will significantly contribute to bringing inflation back to target in a timely manner." With President Lagarde emphasizing the 'duration,' the market interpreted this as a signal that the ECB will hold rates steady.

However, the recent sharp rise in international oil prices is a variable. With oil prices jumping to around $90 per barrel, there remains the possibility that future inflation trends and the monetary policy stance of the Fed and other central banks could change. Although major central banks are entering the final stages of tightening, there are also forecasts that the current high interest rates will persist for a long time. Jamie Dimon, chairman of JP Morgan and known as the 'Emperor of Wall Street,' even mentioned the possibility of the benchmark rate rising to 7%. In an interview with the Indian media Times of India on the 26th, he said, "The world may not be prepared for the worst-case scenario where the Federal Reserve raises the benchmark rate to 7% amid stagflation (rising prices during economic stagnation)."