What September’s Mixed Inflation News Means for the Fed

The September Consumer Price Index report showed that the annual inflation rate was slightly higher than economists expected, prompting investors to recalibrate their expectations for a series of swift and deep interest rate cuts over the next few months. Still, price pressures are improving and the inflation rate has fallen to its lowest level since February 2021.

The Bureau of Labor Statistics reported Thursday that the CPI rose 2.4% in September from year-ago levels—a tick down from August’s 2.5% rate—and 0.2% from month-ago levels. Analysts were anticipating 0.1% monthly growth and 2.3% annual growth. Falling gas prices helped push overall inflation lower.

Core CPI, which excludes volatile food and energy costs, rose 3.3% in September over the last 12 months after rising by 3.2% in August, also surprising analysts. Rising prices for housing, car insurance, healthcare, clothes, and airfare helped drive core inflation higher, according to the BLS.

Morningstar chief US economist Preston Caldwell says that when combined with stronger-than-expected jobs data, Thursday’s data could slow the Federal Reserve’s pace of interest rate cuts, even though inflation is still approaching the central bank’s target. “More data like this month would leave lingering concerns around inflation,” he says, and it could prompt the Fed to leave rates steady at one of its upcoming meetings.

September CPI Report Key Stats

• CPI increased 0.2% for the month, as it did in August.
• Core CPI climbed 0.3% after rising by the same amount in August.
• CPI rose 2.4% year over year after increasing by 2.5% the prior month.
• Core CPI rose 3.3% from year-ago levels after rising 3.2% in August.

According to the report, food prices increased 0.4% after rising 0.1% in August. Food-at-home prices rose 0.4% over the month, while restaurant prices increased 0.3%. Gasoline prices fell 4.1%, and energy prices overall fell 1.9%, which helped push the overall CPI reading lower than the core reading.

Caldwell suggests this trend may not continue. “Energy prices are likely to bounce back in October, with oil prices rebounding owing to fears of conflict in the Middle East,” he says.

“Durables prices jumped by 1% month over month after over a year of deflationary readings,” he adds. This helped contribute to the surprisingly high core reading. Caldwell says this increase was driven by cars, furniture, jewelry, and other items.

Shelter prices (a major driver of inflation overall) climbed 0.2% after rising 0.5% in August.

Will the Fed Cut Rates in November?

After the Fed cut interest rates by half a percentage point at its September meeting, citing easing inflationary pressures and a renewed focus on a cooling labor market, it seemed possible that more deep rate cuts were on the table for 2024. A few weeks later, a stronger-than-expected September jobs report prompted investors to recalibrate their predictions.

Thursday’s inflation data has done the same. “The odds of a 50-basis-point cut had essentially dropped to zero prior to today (mainly owing to stronger labor market data), but certainly today’s data further subtracts from any case to cut by 50-basis points,” Caldwell says.

Markets now see a 90.5% chance of a quarter-point interest rate cut at the central bank’s next meeting in November, according to the CME FedWatch Tool. That would bring the target federal funds rate down to a range of 4.50%-4.75%. Traders don’t currently see any chance of a larger cut in November. That’s a big change from a week ago, when markets were pricing in a one-in-three chance of a 0.5% cut.

Caldwell expects a quarter-point rate cut in November, but he adds that stronger economic data in the weeks ahead “could induce a skip in the December 2024 or January 2024 meetings.”