The US economy received a wake-up call in October as inflation unexpectedly reversed course. After six consecutive months of easing, the annual inflation rate, as measured by the Consumer Price Index (CPI), climbed to 2.6%. This outcome, which was in line with economist predictions, casts doubt on the disinflationary trend that consumers and policymakers had hoped would persist. The challenging path ahead for the Federal Reserve’s 2% inflation target is now more apparent.
The October inflation report has sparked renewed caution among policymakers. On Tuesday, Minneapolis Fed President Neel Kashkari cautioned that he might consider pausing a potential December rate cut if inflation data came in higher than anticipated. Prior to the release of the report, market-implied odds of a 25-basis-point cut in December were at 58% according to the CME FedWatch tool.
The monthly CPI increase of 0.2% mirrored the prior month’s rate. The core CPI, which excludes volatile energy and food prices to better gauge underlying inflation pressures, remained steady at 3.3%, aligning with forecasts. On a monthly basis, core CPI rose by 0.3% as expected.
Several key drivers contributed to the October inflation uptick. The shelter index saw a significant 0.4% increase, accounting for over half of the overall monthly rise in all items. The food index also experienced an upward trend, increasing by 0.2%. Within the food index, the food-at-home index rose by 0.1%, while the food-away-from-home index climbed by 0.2%. The energy index remained stable in October after a 1.9% decrease in September.
Other indexes that rose in October included used cars and trucks, airline fares, medical care, and recreation. Counterbalancing these increases, apparel, communication, and household furnishings and operations saw declines.
The October inflation report serves as a stark reminder that the path to a stable and sustainable economic recovery is still fraught with challenges. While the Federal Reserve remains committed to its 2% inflation target, the recent uptick in inflation suggests that the journey may be more arduous than initially anticipated.
