The U.S. October CPI accelerated year-on-year growth to a three-month high, but met expectations, with no change to the December rate cut bets

In October, the year-on-year growth rate of the U.S. nominal CPI accelerated to 2.6%, in line with expectations but reaching a three-month high, ending a "six-month decline." The core inflation rate has not seen a decline for three consecutive months, but Wall Street believes that a 25 basis point rate cut by the Federal Reserve in December is a certainty.

On November 13, Wednesday, the U.S. Bureau of Labor Statistics released data showing that both the month-on-month and year-on-year growth rates of the U.S. nominal and core CPI for October met market expectations. Specifically, the nominal CPI rose by 0.2% month-on-month, while the core CPI increased by 0.3% month-on-month and 3.3% year-on-year, remaining flat compared to previous values.

It is worth noting that the year-on-year growth of the nominal CPI at 2.6% is an increase of 0.2 percentage points from the previous value of 2.4% in September, marking the first acceleration in year-on-year growth since March of this year. The core inflation rate also remains robust, highlighting the challenges the Federal Reserve faces in achieving its inflation targets.

Currently, the U.S. nominal CPI inflation has increased month-on-month by 0.2% for four consecutive months, while the core CPI, excluding food and energy costs, has risen month-on-month by 0.3% for three consecutive months. Economists believe that core data better reflects inflation trends than nominal data. Additionally, calculations show that the annualized growth rate of the U.S. core CPI over the past three months is 3.6%, the fastest growth rate since April of this year.

However, analyst Chris Anstey pointed out that there is good news regarding inflation for the Federal Reserve: the so-called "super core" services index, which excludes housing costs, saw its smallest increase in three months in October, and the month-on-month increase of 0.31% is slightly below this year's average level of 0.35%.

At the same time, the year-on-year growth rate of the nominal CPI at 2.6% has significantly slowed compared to 3.2% in October of last year and the new high of 9.1% in 2022, indicating that inflation is still on a cooling trend. There is also a certain degree of "catch-up inflation" in the data:

"For example, the rent inflation indicator lags behind the inflation indicator for new leases. Auto insurance companies must negotiate price increases with state regulators, so cost increases take time to reflect in prices."

Wall Street is confident that a rate cut in December is a certainty, with an unclear outlook for 2025, and a pause in rate cuts may occur as early as January.

After the data release, 2026 voting member and Dallas Federal Reserve President Logan stated that the FOMC will continue to cut rates in the future, but there is uncertainty regarding the level of the neutral interest rate, urging the Federal Reserve to be cautious about the extent of rate cuts. Another hawkish voting member for the following year, Minneapolis Federal Reserve President Kashkari, stated that the nominal CPI data makes him believe that inflation "is moving in the right direction."

Traders have increased their bets on a 25 basis point rate cut by the Federal Reserve in December, with the probability rising from 60% before the data release to about 80%.

As Wall Street considers a rate cut in December to be "a certainty," the U.S. dollar and Treasury yields fell, with short-term bond yields, which are sensitive to interest rates, experiencing the largest declines. Spot gold surged briefly, returning above $2,600. The two-year Treasury yield fell by about 10 basis points, approaching 4.24%. The U.S. dollar index briefly dipped below 105.8 points, falling about 20 points in the short term, moving away from a four-month high

U.S. stock futures dipped in pre-market trading, with the Nasdaq 100 index futures narrowing their decline to 0.17%. However, at the market open, both the S&P and Nasdaq opened higher, but within half an hour, all three major U.S. indices collectively turned lower again, followed by a rebound in the Dow.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, and Lindsay Rosner, head of multi-sector fixed income investment at Goldman Sachs Asset Management, both believe that the latest CPI data makes a rate cut in December the most likely outcome, as inflation continues to show a cooling trend.

However, the path for rate cuts by the Federal Reserve in 2025 is less clear. On one hand, CPI data shows that the inflation rate is moving further away from the central bank's 2% target, and potential tariffs and spending policies from the Trump administration could push inflation higher, complicating the monetary policy outlook.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, stated that the CPI data was not surprising, and the Federal Reserve is expected to cut rates again in December:

"However, considering the uncertainties surrounding potential tariffs and other Trump administration policies, the situation will be different next year. The market is already weighing the possibility that the Federal Reserve will cut rates fewer times in 2025 than previously expected, possibly hitting the pause button as early as January."

The team of economists led by Sarah House at Wells Fargo also noted that the inflation data over the past few months has not shown significant progress, and the election results have raised new questions about the future path of price growth:

"Therefore, we believe the FOMC will soon signal that the pace of rate cuts will further slow, perhaps starting in 2025, with the pace slowing to a level of cutting rates at every other FOMC meeting."

Following the election results, Wall Street traders have indeed lowered their expectations for future rate cuts by the Federal Reserve in recent days, now anticipating a 75 basis point cut by the end of 2025, which is about 50 basis points lower than bets made before the presidential election.

Investors are also closely watching the October U.S. PPI producer price index to be released on Thursday, as well as remarks from Federal Reserve Chairman Jerome Powell.

Some analysts suggest that if the next CPI data on December 11 shows further inflationary pressures, the Federal Reserve may choose to pause rate cuts at the FOMC meeting the following week. Particularly, if the U.S. non-farm payroll data for November, released on December 6, shows a rebound in new jobs, confirming that the slowdown in October's employment was merely due to hurricanes and strikes, then bets on pausing rate cuts will significantly increase

CPI Data Analysis: Housing Inflation Returns, Used Car Prices Hit Largest Increase in Over a Year

The U.S. Bureau of Labor Statistics stated that the most notable feature of this CPI data is that at least half of the month-on-month increase comes from rising housing costs, which remain robust.

From the various components:

Housing prices increased by 0.4%, doubling the month-on-month increase from September, and rising 4.9% year-on-year. Owners' equivalent rent also rose by 0.4% month-on-month.

Used car prices rose by 2.7% month-on-month, the largest increase in over a year, airline ticket prices increased by 3.2% month-on-month, and hotel prices rose by 0.4% month-on-month, likely reflecting the damage caused by Hurricanes Helen and Milton.

Health insurance prices increased by 0.5% month-on-month, mainly due to the prior update of premium source data by the U.S. Bureau of Labor Statistics.

Motor vehicle insurance prices decreased by 0.1% month-on-month, marking the second decline since early 2022, but still rose by 14% year-on-year, providing little relief to consumers.

Energy prices remained flat month-on-month, with gasoline price declines offset by increases in electricity and natural gas prices. However, clothing prices saw their largest drop since the outbreak of the pandemic in 2020, and energy prices fell by 4.9% year-on-year.

Additionally, the food index rose by 0.2% month-on-month and increased by 2.1% year-on-year, particularly as egg prices, despite a month-on-month drop of 6.4%, remain significantly higher than the same period last year by 30.4%.

Some analyses pointed out that excluding housing and energy, service prices rose by 0.3% month-on-month, lower than the previous value in September. Core goods prices, excluding used cars, fell by 0.2% month-on-month, marking the largest decline this year.

Other analyses indicated that the inflation indicator more closely watched by the Federal Reserve, the PCE (Personal Consumption Expenditures) price index, does not assign as high a weight to housing costs as the CPI inflation does, which is one reason why the PCE is closer to the Federal Reserve's inflation target.

Monetary policy makers are also closely monitoring wage growth, as it will help predict trends in consumer spending, the main engine of the economy. Another report on Wednesday combined inflation with wage data, showing that real income in October increased by 1.4% year-on-year, unchanged from the previous value