New York (TIP)- US consumer prices rose slightly more than expected in September, but the annual increase in inflation was the smallest in more than 3-1/2 years, potentially keeping the Federal Reserve on track to cut interest rates again next month.
The consumer price index increased 0.2% last month after gaining 0.2% in August, the Labor Department’s Bureau of Labor Statistics said on Thursday. In the 12 months through September, the CPI climbed 2.4%. That was the smallest year-on-year rise since February 2021 and followed a 2.5% advance in August.
Economists polled by Reuters had forecast the CPI edging up 0.1% and rising 2.3% year-on-year. The annual increase in inflation has slowed from a peak of 9.1% in June 2022.
Together with a significant moderation in the inflation measures tracked by the U.S. central bank for its 2% target, that allowed the Fed to shift focus to the labor market and deliver an unusually large 50 basis points rate cut in September.
Monetary Policy
Minutes of that meeting published on Wednesday showed a “substantial majority” of policymakers supported beginning an era of easier monetary policy, but there appeared even broader agreement that the initial move would not commit the Fed to any particular pace of rate reductions in the future.
The first rate reduction since 2020 lowered the central bank’s policy rate to the 4.75%-5.00% range. The Fed hiked rates by 525 basis points in 2022 and 2023.
Labor market resilience and solid consumer spending have, however, forced investors to abandon hopes for another half-percentage point rate reduction next month.
The economy added the most jobs in six months in September and the unemployment rate fell to 4.1% from 4.2% in August. Revisions to national accounts data last month from 2019 through the second quarter of this year also showed that the economy was in much better shape than previously estimated.
There are also some pockets of stickiness, especially rents, which are slowing the pace of cooling in underlying inflation.
Excluding the volatile food and energy components, the CPI increased 0.3% in September after rising 0.3% in August. In the 12 months through September, the so-called core CPI advanced 3.3%. That followed a 3.2% gain in August.
Early on Thursday, financial markets saw a roughly 76% probability of a 25 basis points rate cut at the Fed’s Nov. 6-7 policy meeting, according to CME Group’s FedWatch Tool. The odds of rates being unchanged were at about 24%.
US dollar rises to two-month high
The U.S. dollar edged higher on October 9, taking in stride the release of minutes from the Federal Reserve’s September meeting that showed a substantial majority of policymakers backed its outsized 50-basis point rate cut.
Traders also digested comments from Fed officials and kept their powder dry for Thursday’s release of September’s consumer price index.
Investors were confident that the central bank will not continue easing so aggressively, and minutes from the Federal Open Market Committee were out of date after last Friday’s robust nonfarm payroll data caused markets to reprice near-term Fed rate cut expectations.
“The market has been building up to the minutes for a couple of days now, both the minutes and the inflation report. So, the dollar index has been moving up higher and clearly the tipping point was the strong U.S. jobs report,” said Amo Sahota, executive director at Klarity FX in San Francisco.
Sahota said it looked like Fed Chair Jerome Powell had to convince more participants than originally thought who had supported only a quarter-point cut. The minutes said “a few others indicated they could have supported such a decision.”
Source: Reuters