Don't forget about inflation after the non-farm payroll! This week's CPI data is still significant

In September, the unexpectedly large increase in non-farm payrolls in the United States has left investors puzzled about the direction of the Federal Reserve's policy. Previously, the Federal Reserve had indicated that after years of battling inflation, it had shifted its focus to the labor market.

However, following the release of strong wage reports, market commentators have expressed concerns that inflation may not have completely disappeared, making the CPI data to be released this week crucial.

Last month, the U.S. added a staggering 254,000 jobs, nearly double the market's expectations, and the unemployment rate dropped to 4.1%.

Economist Mohamed El-Erian stated that this allows the Federal Reserve to once again shift some of its focus back to combating inflation. In recent months, as the Federal Reserve shifted its focus to what seemed like a deteriorating labor market situation, concerns about inflation took a back seat, but with the September job report exceeding expectations, this narrative may be premature.

El-Erian pointed out in an interview, "For the Federal Reserve, this means it needs to resist market pressures more firmly, that it cannot fall into the trap of a single mission. There have been enough claims that 'inflation is dead,' but inflation is not dead. Claims that the Federal Reserve should only focus on full employment have also been plentiful."

UBS suggests that the upcoming CPI report will be the next focal point for the market. UBS senior economist Brian Rose stated in a report last Friday, "The September CPI data will be the next key data point. If the price increase exceeds expectations, coupled with strong labor data, the likelihood of the Federal Reserve staying put in November will increase."

Analysts at Bank of America wrote last Friday that the Federal Reserve may have been somewhat panicked last month, but now, there may no longer be a need for another significant rate cut. The bank has adjusted its forecast for the Federal Reserve's November meeting from a 50 basis point cut to a 25 basis point cut.

Few analysts are hinting that the Federal Reserve will keep rates unchanged next month, but investors have clearly adjusted their expectations.

Currently, hardly any traders expect the Federal Reserve to cut rates by 50 basis points in November. Before the release of the employment report last Friday, the market predicted a roughly 33% chance of another significant rate cut by the Federal Reserve. Now, the CME Group's FedWatch tool shows that there is a 99% probability of a 25 basis point rate cut by the Federal Reserve in November, with only 1% of investors expecting rates to remain unchanged.

While banks like Barclays suggest that the strong momentum in the labor market may reignite inflation concerns in the future, a significant surge is not a universal consensus. For example, Bank of America expects a month-on-month increase of 0.1% and 0.3% in overall CPI and core CPI in September, changes that are not sufficient to impact the Federal Reserve's decisions.

Nevertheless, given that inflation remains slightly above the Federal Reserve's 2% target, some analysts warn investors not to overlook price pressures. Seema Shah, Global Chief Strategist at Principal Global Investors, stated that unexpected changes in the labor market will only make this point more crucial She said:

"The market needs to closely monitor inflation, as there are many policy risks."