The US inflation rebound is imminent: Can the Federal Reserve hold its ground?

The United States inflation is about to enter a phase filled with uncertainty, and the Federal Reserve's response capability will once again become the market's focus of attention. According to the latest data, although the inflation rate has dropped significantly in the past two years, signs of a year-end rebound are emerging, which may pose challenges to the expectations of an interest rate cut.

Signs of inflation rebound

The inflation indicator preferred by the Federal Reserve - the core personal consumption expenditures (PCE) price index reached 2.1% in September 2024, close to the target. However, recent data suggests that this index may rise to 2.3% in October, and by year-end it may even climb to 2.6%. Core inflation is even more worrying, having held steady at 2.7% since July and possibly rising to 3% by year-end.

Why is there an inflation rebound?

Economists point out that part of this inflation rebound is due to the 'base effect'. The inflation base between October and December 2023 was extremely low, so even if the monthly increase in year-end inflation remains around 0.2% in 2024, the annual rate will naturally rise. In addition, rising transportation costs, housing, and rent have brought additional pressure to inflation.

However, the resurgence of inflation is not just a statistical illusion. Short-term price indicators also show an upward trend, indicating that inflation pressures are somewhat persistent.

The Fed's Dilemma

In this situation, how the Fed responds becomes the focus. If inflation continues to rise at the end of the year, market expectations for a rate cut in 2025 will be more cautious. Economists at Citibank predict that inflation may start to decline in 2025, but the Fed still faces challenges in reaching the 2% target.

Implications for Investors

For investors, the uncertainty of inflation means that future monetary policies will be more volatile. If inflation worsens further, the Fed may be forced to extend its high interest rate policy, which will put pressure on the stock and bond markets. Investors need to closely monitor inflation data in the coming months and adjust their asset allocation strategies.

In conclusion, the resurgence of inflation is challenging the market's confidence in the Fed's policies. Although the current rebound may be temporary, the risk the Fed faces is that any misjudgment of inflation could disrupt market expectations of a rate cut. In the coming months, every fluctuation in inflation data will be a crucial factor affecting market sentiment.

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