Will CPI Confirm the Anti-Inflation Trend, Making It Difficult for the Federal Reserve to Not Cut Interest Rates in November?

The report is scheduled to be released at 8:30 p.m. Beijing time on Thursday, and is expected to show a year-on-year increase in overall inflation rate of 2.3%, lower than the 2.5% in August, which was the lowest level since the beginning of 2021. On a month-on-month basis, the overall inflation rate is expected to rise by 0.1%, a slight decrease from 0.2% in August. Excluding the volatile food and energy costs, core inflation in September is expected to increase by 3.2% year-on-year, the same as in August; while the month-on-month growth rate is expected to slightly slow down to 0.2%, compared to 0.3% in August.

Although inflation in the United States has eased, it still remains above the Federal Reserve's 2% target annually. However, the Federal Reserve has recently shifted its focus to the labor market, which has shown remarkable resilience in the face of high interest rates.

Data from last Friday showed that the labor market added 254,000 jobs in September, exceeding economists' expectations of 150,000, while the unemployment rate dropped from 4.2% to 4.1%.

This strong report has changed expectations for the future interest rate path, with the market now expecting the Federal Reserve to cut rates by a modest 25 basis points in November, rather than another significant 50 basis points cut.

Citigroup economist Veronica Clark wrote in a report to clients on Monday, "We believe the threshold for the Federal Reserve to not cut rates in November is very high. Ultimately, we expect that the mild inflation backdrop and the re-emergence of soft labor market trends in the coming months will lead officials to cut rates by 25 basis points in November and by 50 basis points in December."

However, if inflation data is too hot, the market may still be spooked.

Ohsung Kwon, a strategist at Bank of America, wrote on Monday, "As long as inflation does not spike again, good news is good news for the stock market. Following the surge in the employment report last Friday, we believe the importance of this week's CPI has increased."

He warned, "While the stock market should be able to withstand a slight unexpected uptick in inflation given the improvement in macroeconomic data, a fairly large surprise could bring uncertainty to the easing cycle and more volatility to the market."

Housing Inflation and Core Services Inflation Are Sticky

For the Federal Reserve, the biggest challenge in combating inflation currently lies in the persistently high core inflation rate, with costs of core services such as housing, insurance, and healthcare remaining elevated.

Citigroup's Clark stated, "We believe there is a risk of strength in owner's equivalent rent relative to our expectations." Owner's equivalent rent is the expected rent that homeowners would receive for renting out their own residences in the market, and is a subset of the housing index, one of the largest individual components in the CPI.

Bank of America believes that increases in sticky rents, out-of-home accommodation prices, used car prices, and airfare prices could translate into a stronger month-on-month core CPI in September, despite price declines in these two categories in August US Bank economists Stephen Juneau and Jeseo Park wrote in their data outlook: "While we expect core CPI in September to be stronger than recent data, our forecast will not change our mid-term outlook for further inflation slowdown. Cooling labor market, coupled with stable inflation expectations, should keep anti-inflation on track."

However, both investment banks added, "There are still some upside risks to consider, including East Coast port strikes, rising oil prices, and increasing shipping costs. These risks will result in a more gradual anti-inflation process than we currently anticipate."