US Inflation and Fed Dilemma

Investing.com — Headline inflation in the US slowed on an annualized basis in September but exceeded expectations, posing a potential dilemma for Federal Reserve officials considering further interest rate cuts this year.

The consumer price index (CPI), a crucial gauge of US headline inflation, decelerated to 2.4% versus 12 months ago, down from 2.5% in August. Economists had anticipated a figure of 2.3%.

Month-on-month, the reading matched August's pace of 0.2%, which was projected to cool slightly to 0.1%.

Meanwhile, 'core' CPI, which strips out more volatile items like food and fuel, unexpectedly accelerated to 3.3% year-on-year, hotter than forecasts expecting it to align with August's pace of 3.2%.

On a monthly basis, core consumer price growth came in at 0.3%, matching the prior month's rate, which was projected to ease to 0.2%.

Separate data showed that seasonally-adjusted claims for first-time unemployment benefits rose to 258,000 in the week ending Oct. 5, up from 225,000 the previous week. This marked the highest level for initial claims since August 2023.

The four-week moving average for jobless claims also edged up by 6,750 to 231,000.

Both data points come as Fed policymakers attempt to engineer a 'soft landing' for the US economy, aiming for elevated interest rates to quell inflation without causing a significant downturn in labor demand or broader activity.

Last month, the Fed cut borrowing costs by an outsized 50 basis points, emphasizing the necessity to support the jobs market amid waning inflation. However, subsequent meeting minutes revealed that some officials backed a smaller quarter-point cut due to concerns about price growth remaining above their 2% target.

Traders are pricing in about an 85% chance the Fed will cut rates by another 25 basis points at its November meeting, according to CME Group's FedWatch Tool. There is a roughly 14% probability that rates will remain unchanged in the current range of 4.75% to 5.00%.

Analysts at Vital Knowledge commented that the takeaway from this data is 'negative' and could raise fears of stagflation, a weak job market combined with rising prices. However, they believe the Fed is unlikely to change its outlook significantly, maintaining expectations of 25-basis point cuts at its final gatherings of 2024.

Yet, the recent focus of the Federal Open Market Committee appears to lean more towards labor market metrics, suggesting Powell and colleagues will scrutinize claims reports more closely than CPI data.