Inflation cooled less than expected in September, leaving the US Federal Reserve's goal to curb annual inflation growth to 2% elusive and fueling concern that it was too aggressive at the start of its rate-cutting cycle.
The consumer price index, the market's preferred inflation gauge, rose 2.4% from a year earlier, while "core" CPI, which strips out volatile food and energy prices, increased 3.3%. Economists expected each to be about 10 basis points lower, according to Econoday. The data came just over three weeks after the Fed voted to cut interest rates by 50 basis points as it shifts its focus from reining in inflation to preventing jobs market weakness.
The latest CPI data is unlikely to spark fear of a return to sustained high inflation, but it could renew focus on upcoming inflation data as Fed officials weigh the possibility of further rate reductions at the final two meetings of the year, said Bret Kenwell, a US investment analyst at eToro.
"When coming out of a high inflation environment, there's always a concern — be it from investors, consumers or the Fed — that we'll face periods of reflation as monetary policy eases," Kenwell said. "While one report isn't likely to sway policymakers in one direction or the other, it could at least slow the market's expectations for the size and speed of upcoming rate cuts."
Shelter cooling off
Much of the rise in September was due to jumps in apparel and travel prices, which tend to shift substantially from month to month, said David Russell, global head of market strategy at TradeStation. Apparel rose 1.8% from August to September, while women's underwear, nightwear, swimwear and accessories increased 6.5%. Watches jumped 6.4% and boys' apparel climbed 5.7%. Transportation services increased 8.5% from August.
Shelter, one of the most significant drivers of inflation, registered its smallest annual increase since February 2022 at just 4.9%.
"If it keeps trending lower, headline and core are likely to follow," Russell said.
The combination of cooling rent inflation, moderating wage growth, reduced mark-ups, increased price sensitivity and a still cautious consumer should drive "a healthy disinflationary impulse" into next year, Gregory Daco, EY chief economist, said in an Oct. 10 note.
Annual CPI growth will likely fall to about 2.3% by the end of 2024, with core CPI inflation dipping below 3% for the first time since April 2021.
"But we note the risk from rising tensions in the Middle East pressuring oil and gasoline prices as well as the risk from hurricane distortions," Daco wrote.
Investors may question whether the Fed should have cut by 50 bps in September if inflation fails to fall much in the near term, but the data has been particularly volatile, said John Kerschner, head of US securitized products at Janus Henderson Investors.
"Separating the signal from the noise has never been harder," said Kerschner. "While I still think the Fed is more focused on the labor market, I don't think they will 'spike the football' on inflation until it is consistently at or below their target 2% level, which could still be several quarters away."