October Inflation Goes Up As Expected, Will the Fed Adjust Its Rate Cut Accordingly?

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The October inflation report revealed an annual increase of 2.6% in the consumer price index (CPI), up from 2.4% in September. This marks a slight uptick after months of declining inflation rates, with the monthly CPI rising 0.2% in line with Wall Street expectations. Core CPI, which excludes food and energy, accelerated 0.3% in October and maintained a 3.3% annual increase, matching economist forecasts.

Shelter prices were the primary driver of October’s inflation rise, accounting for over half of the monthly increase. The shelter index climbed 0.4% for the month and 4.9% year-over-year, continuing to pressure overall inflation. Other contributors included a 2.7% increase in used vehicle costs and a 3.2% jump in airline fares. However, energy prices remained flat, and food costs rose modestly by 0.2%, indicating that inflation remains uneven across sectors.

This return to rising inflation levels has raised concerns about how the Federal Reserve will adjust its monetary policy. The increase, although expected, moves inflation further from the Fed’s 2% target, creating new challenges for policymakers.

Federal Reserve’s Response to Rising Inflation

The Federal Reserve, which began cutting interest rates in September after previously hiking them to a two-decade high, now faces the challenge of balancing its rate strategy. The October inflation report has left markets uncertain about whether the Fed will proceed with its anticipated December rate cut.

Fed Chair Jerome Powell has remained cautious, emphasizing that further rate adjustments will depend on sustained evidence of inflation control. While the market currently prices in a 72% chance of a 25-basis-point cut in December, experts warn that any unexpected inflation spikes could prompt the Fed to pause its rate-cutting plans. Minneapolis Fed President Neel Kashkari recently stated that higher-than-expected inflation data might lead to a reevaluation of December’s rate cut.

Although the recent inflation data aligns with expectations, some economists believe that external factors such as energy prices could destabilize inflation trends. Eugenio Aleman, chief economist at Raymond James, cautioned that “oil and gas price surges could severely compromise the Fed’s inflation target.” This underscores the importance of monitoring global energy markets as a key factor in the Fed’s future decisions. 

Market Reactions to the October Inflation Report

The financial markets responded predictably to the October inflation data. Stock market futures rose slightly following the report’s release, while Treasury yields declined. The Nasdaq 100 and S&P 500 each gained 0.2% in premarket trading, and small-cap stocks led the rally, with the Russell 2000 futures surging over 1%. Meanwhile, the two-year Treasury yield dropped by seven basis points to 4.28%, reflecting investor optimism about potential rate cuts.

Despite the relatively subdued market reaction, analysts are already reassessing their expectations for the Federal Reserve’s 2025 rate path. According to Morgan Stanley’s Ellen Zentner, the Fed may implement fewer rate cuts than previously anticipated if inflation continues to hover above the 2% target. The central bank has already reduced its key borrowing rate by 0.75 percentage points and had been expected to cut rates aggressively through 2025. However, traders are now pricing in just three more rate cuts, signaling a more cautious outlook.

The Broader Implications of October Inflation

The October inflation uptick serves as a reminder of the ongoing challenges in achieving price stability. While inflation has cooled significantly since its June 2022 peak of 9.1%, persistent pressures in categories like shelter and transportation highlight the complexity of managing inflation dynamics. Federal Reserve officials have expressed a willingness to adapt their policies as needed, indicating that rate cuts are not guaranteed if inflationary trends worsen.

President-elect Donald Trump’s economic policies, which include potential new tariffs and increased government spending, add another layer of uncertainty. Economists warn that these measures could fuel inflation further, complicating the Fed’s efforts to maintain price stability. As the Fed navigates these challenges, its decisions will have significant implications for businesses, consumers, and the broader economy.

Do you think the Federal Reserve will proceed with a rate cut in December despite rising inflation? Let us know what you think.

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