US consumer prices rose by 0.2% in September from August, and excluding energy and food, they rose by 0.3%. This was a tenth more than expected in both cases, hinting at a potential trend of increasing consumer prices. However, this data does not necessarily negate the possibility of further interest rate cuts by the Federal Reserve at its next meeting in November and beyond. While the big 50 basis points rate cut in September may be an exception, analysts believe that a smaller rate cut could still be in the cards.
The decline in inflation that was expected to continue appears to have stalled, with consumer prices rising for the second month in a row. This unexpected increase in the core rate of the consumer price index has caught the attention of market observers. However, this rise in prices may not be fully reflected in the Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) deflator. Some prices that have increased significantly may not be weighted as heavily or even be sourced differently in the PCE deflator.
Despite the recent rise in consumer prices, there is still optimism regarding a continued easing of price pressure. However, this data may temper that optimism and suggest a more cautious approach by the Federal Reserve. A jumbo rate cut of 50 basis points is unlikely to be repeated, and even a 25 basis point cut may not be a guaranteed move. Despite this, analysts are sticking to their forecast of a 25 basis point cut at the November meeting. The ongoing easing in service prices is seen as a factor that will influence the direction of monetary policy in the medium term.
Overall, the unexpected rise in consumer prices in September highlights the complex nature of inflation and its impact on monetary policy decisions. While further interest rate cuts are still possible, the recent data suggests a more cautious approach by the Federal Reserve. The ongoing easing in service prices remains a key factor in determining the future direction of monetary policy. Market participants will be closely watching the Fed’s decisions in the coming months to gauge the impact of inflation on the economy.
