The September Consumer Price Index (CPI) report, which showed a slight increase in inflation, has not altered the general market sentiment of ongoing disinflation, nor has it swayed expectations for a potential interest rate cut in November. While headline inflation exceeded forecasts, economists and Federal Reserve officials remain focused on the broader trend of cooling price pressures and a softening labor market.
The CPI climbed by 2.4% in September compared to the previous year, slightly lower than August’s 2.5% but surpassing estimates of 2.3%. Core inflation, which excludes volatile food and energy prices, unexpectedly rose from 3.2% to 3.3%, defying analyst predictions for no change.
Simultaneously, the U.S. labor market experienced a jump in jobless claims to 258,000. Despite the sharp increase, experts attribute this surge to temporary disruptions rather than underlying structural weakness in the labor market.
Austan Goolsbee, president of the Chicago Federal Reserve Bank, downplayed the significance of the minor uptick in inflation, emphasizing the broader trend of disinflation. “The overall trend over 12 to 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is,” Goolsbee said in a Thursday interview with CNBC. He also indicated that the Fed is transitioning towards a more balanced risk environment, suggesting that the Federal Open Market Committee might gradually cut interest rates over the next 12 to 18 months.
Economists have expressed mixed reactions to the CPI data. Stephen Juneau, an economist at Bank of America, highlighted the surprising strength in core goods prices, which rose 0.17% month-over-month. “Core goods rose by 0.17% owing largely to a 1.1% increase in apparel,” Juneau said, cautioning against overreacting to this fluctuation. He added, “We do not think goods prices will continue to rise by 0.2% m/m. However, supply chain disruptions and rising import prices likely mean goods prices will no longer be a key driver of disinflation.”
Joe Brusuelas, chief economist at RSM US LLP, cautioned that hurricanes Helene and Milton would distort growth, inflation, and employment data for the fourth quarter. “At this point, the October jobs report will likely show flat or negative growth in total employment and an increase in unemployment,” Brusuelas said, suggesting that reliable economic data might not emerge until late 2024 or early 2025. Despite these disruptions, Brusuelas remains optimistic, stating that the September inflation data and short-term economic challenges won’t derail the Fed’s plans to cut rates. “We are confident that the Federal Reserve remains on a path to cut the Federal Funds rate,” he added, predicting a 25 basis point rate cut in November followed by another in December.
Goldman Sachs economist Jan Hatzius emphasized the volatility in specific CPI components, such as airfares and car insurance. “This month featured another strong increase in the volatile airfares component (+3.2%) and a 1.2% rise in car insurance,” Hatzius said, anticipating these categories to cool in the coming months. Regarding the rise in unemployment claims, Hatzius attributed it to Hurricane Helene, auto layoffs, and Boeing strikes in Washington and Oregon.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, reassured investors that the broader economy remains robust. “It is still likely that the Fed will go ahead and cut by 25 bps next month,” he said. If labor and inflation data remain steady, another cut could follow in December, he added.
Quincy Krosby, chief global strategist for LPL Financial, offered a dissenting viewpoint, suggesting that the current data could rekindle concerns over stagflation, a condition where inflation rises even as growth slows. “Today’s report is sure to spark concerns that a mild form of stagflation is beginning to take hold,” he said, highlighting the potential for increased discussions among Fed officials regarding balancing their dual mandate of stable prices and full employment.
At midday trading in New York, the S&P 500 index remained relatively unchanged.
