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October CPI Report Forecast to Show Overall Inflation Moderating

Core inflation seen remaining sticky, but the Fed to hold rates steady in December.

Federal reserve inflation artwork

The Consumer Price Index report for October 2023 is forecast to show a continued overall decline in inflation, led largely by moderating energy prices.

However, economists expect core CPI (which excludes volatile food and energy prices) to show stickiness rather than improvement, holding at levels well above the Federal Reserve’s target.

According to FactSet, the overall CPI is forecast to come in at a 3.3% annual rate in October, down from 3.7% in September. Meanwhile, core CPI is expected to remain at September’s levels, with a 4.1% increase from a year ago.

Against this backdrop, analysts will be watching October’s report closely for clues about the Fed’s next decision on interest rates, though bond traders overwhelmingly expect the central bank to keep rates at their current levels come December.

“We’re getting into a period where things are going to be settling down,” says Jeffrey Roach, chief economist at LPL Financial. He adds, “It should be a decent report overall for markets” as price growth continues to normalize. Recent data on the labor market shows hiring slowing down as well.

However, that doesn’t mean the rate-hiking cycle is over. On Thursday, Fed Chair Jerome Powell left the door open for future raises, and he warned against being “misled by a few months of good data.” He added that the Fed is not yet confident that monetary policy is sufficiently restrictive to return inflation to target levels. “If it becomes appropriate to tighten policy further,” he said, “we will not hesitate to do so.”

October CPI Report Forecast Highlights

  • The CPI is forecast to rise 0.1% in October after increasing 0.4% in September.
  • Core CPI is forecast to rise 0.3% in October after increasing the same amount in September.
  • The CPI year over year is forecast to rise 3.3% in October after rising 3.7% in September.
  • Core CPI year over year is forecast to rise 4.1% in October after rising the same amount in September.

CPI vs. Core CPI

Falling Energy Prices Will Drive Inflation Slowdown

Analysts say much of the forecast reduction in headline inflation can be attributed to recent declines in energy prices, which spiked at the end of the summer and drove up inflation readings in August and September.

Eric Merlis, managing director and co-head of global markets at Citizens Bank, doesn’t expect investors to get tripped up on noisy energy readings (which aren’t included in core inflation data) this time around. “People are going to look through that,” he says.

In a research note on Nov. 9, Bank of America analysts said they expect rising services prices to remain the primary driver of core inflation in October, as they have been in previous months. But that growth could slow in the months ahead.

“Consumers are starting to pull back, particularly on services spending,” Roach says. He’ll be keeping an eye on declines in leisure and hospitality.

Economists are also looking out for a slowdown in rent and owners’ equivalent rent. Falling rent prices “will certainly continue to depress the headline inflation number,” Roach explains.

But Bank of America’s analysts say price disinflation in this category has been much slower than they anticipated.

Is the Fed Done Hiking Interest Rates?

Market watchers generally expect the Fed to hold rates steady at its meeting next month, given the recent cooling in the labor market and slowdown in price growth.

As of Friday morning, bond markets were pricing in a roughly 91% chance that the central bank will keep interest rates steady at its December meeting, along with a roughly 9% chance of a 0.25% hike to a target range of 5.50%-5.75%.

“I think markets are right to minimize the chance of any additional hikes out of the Fed in December,” Roach says.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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