On Thursday, October 10th, the U.S. Department of Labor released a report stating that the inflation rate in September was higher than expected, and the number of initial unemployment claims unexpectedly increased following the devastation caused by Hurricane Helen. This has further fueled speculation that the Federal Reserve may cut interest rates by 25 basis points in November.
The Consumer Price Index (CPI) is a widely used measure of the cost of goods and services in the U.S. economy. The Labor Department’s report revealed that after seasonal adjustments, the inflation rate in September rose by 0.2% on a month-on-month basis, with an annual inflation rate of 2.4%. Both figures exceeded the Dow Jones consensus by 0.1 percentage points and were higher than the economists’ expectation of 2.3% year-on-year as surveyed by The Wall Street Journal.
The annual inflation rate was 0.1 percentage points lower than August, marking the lowest level since February 2021.
Excluding food and energy, the core CPI index increased by 0.3% on a monthly basis, with an annual rate of 3.3%. Both core readings also outperformed expectations by 0.1 percentage points.
The Bureau of Labor Statistics stated in a press release that the majority of the rise in inflation (over three-quarters) came from a 0.4% increase in food prices and a 0.2% rise in housing costs, offsetting the 1.9% decline in energy prices.
Increases in prices across various food categories indicate sustained inflation. Egg prices rose by 8.4%, with an unadjusted increase of 39.6% over 12 months. Butter prices rose by 2.8% on a monthly basis, with a 7.8% year-on-year increase.
Other contributing factors to this growth include a 0.3% increase in the cost of used cars, a 0.2% increase in new car prices, a 0.7% rise in healthcare services, and a 1.1% increase in clothing prices.
Housing costs have long been a major component of inflation (accounting for over one-third), rising by 4.9% compared to the previous year, despite a slowdown in the key housing cost index for the month.
Following the release of the Labor Department’s report, U.S. stock index futures fell slightly by 0.35%, indicating a soft opening on Wall Street. The yield on 10-year U.S. treasuries edged lower to 4.0667%, while the 2-year treasury yield dropped to 3.9908%. The U.S. dollar index fell by 0.09%, while the euro rose by 0.02%.
Economists Anna Wong and Stuart Paul from Bloomberg noted that the September CPI report contained both positive and negative news. They observed that while there was progress in the tightening of rental inflation, there were concerns about ongoing inflation in certain essential service categories like car repairs and insurance, even as price pressures in core goods have eased.
“Nevertheless, the preferred inflation gauge for the Fed, the core PCE price index (to be released on October 31), may show slower growth than the CPI, consistent with recent months,” they commented.
With the latest inflation data released, the Fed had already cut rates by 50 basis points in September, and market expectations point to further rate cuts after the November 6th-7th meeting, though the exact pace and extent remain uncertain.
While CPI is not the Fed’s official inflation gauge, it is a key indicator used by policymakers in their decision-making process. Several components of CPI directly influence the Fed’s key Personal Consumption Expenditures Price Index (PCE).
The Fed has a dual mandate of promoting full employment and stable prices. In recent years, the focus has been on restraining high inflation. However, with inflation trending downward over the past year, concerns about a softening labor market have prompted the Fed to shift attention back to employment data this summer.
Fed officials currently have increased confidence that inflation will retreat to the 2% target, but they remain concerned about the state of the labor market.
Robert Pavlik, senior portfolio manager at Dakota Wealth in Connecticut, mentioned to Reuters, “CPI may not be the Fed’s preferred method for tracking inflation, but it’s pretty darn close. People think the Fed will be slower to cut rates.”
Whitney Watson, Co-Head and Co-Chief Investment Officer of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management, stated via email to Reuters, “The September CPI report was stronger than expected, especially the unexpected increase in core CPI. However, labor market data remains the predominant factor the Fed will look at, and we believe next month’s employment figures are even more important in determining the pace and degree of Fed easing.”
Jamie Cox, managing partner at Richmond, Virginia-based Harris Financial Group noted to Reuters via email, “Anybody who thinks the Fed is going to cut rates by another 0.50 basis points in November is mistaken. When rates are not enough to reduce growth, they are not enough to fully tamp down inflation. The Fed will cut rates, but in a measured fashion going forward.”
Bloomberg economists also believe that despite the unexpected rise in the core CPI index, this won’t alter the Fed’s view that inflation is tracking downward. They anticipate a 25 basis point rate cut at the next meeting.
According to the FedWatch indicator from the Chicago Mercantile Exchange Group, there is an 86% probability of a 25 basis point rate cut at the Fed’s November meeting.
In recent days, policymakers have indicated that they see rising risks in the labor market, with Thursday’s data further supporting this view.
The Labor Department’s report released on Thursday showed an unexpected increase in initial claims for unemployment benefits. For the week ending October 5th, seasonally adjusted initial jobless claims reached 258,000, the highest total since August 5, 2023, increasing by 33,000 from the previous week and significantly above the expected 230,000.
Pavlik told Reuters, “This could be due to various factors such as hurricanes or strikes, but the numbers have been on the rise, suggesting that the job market might not be as robust as some had imagined.”
On September 26th, Hurricane Helen struck the southeastern United States, causing widespread damage. Unadjusted data showed that the two hardest-hit states, Florida and North Carolina, saw an increase of 12,376 in their total number of unemployed individuals.