Tonight's CPI is expected to continue to slow down, and the Fed is expected to cut interest rates again in November!

Economists expect that despite price pressures in certain categories such as used cars, the key CPI inflation indicator for September is expected to slow down.

The trend of slowing inflation month-on-month growth rate is expected to continue.

According to Bloomberg's survey of economists, CPI month-on-month growth rate and core CPI month-on-month growth rate excluding food and energy may record 0.1% and 0.2% respectively.

The overall CPI year-on-year growth rate is expected to reach 2.3%, the lowest growth rate since the beginning of 2021. Core CPI year-on-year growth rate is expected to record 3.2% for the second consecutive month.

The recent decline in inflation is attributed to the drop in oil prices and the exclusion of several high CPI readings in 2023 from the calculations. Some analysts believe that it may not be feasible for the CPI annual rate to further decline to 2% this year. Recent increases in oil prices, along with high costs in housing and transportation, persist.

Core CPI is seen as a better signal for future inflation. Prices of groceries and gasoline can sometimes fluctuate significantly, exaggerating the overall price levels. If core CPI shows a significant increase, financial markets may experience turbulence, and reignite considerations about the Fed "pausing" rate cuts—if progress on inflation stalls, the Fed may abandon rate cuts in November or December.

Housing Inflation

Rent and housing prices are the biggest sources of inflation and also the most stubborn cost items.

Over the past two years, the Fed has been hoping for a significant slowdown in housing costs to bring the U.S. inflation rate down to 2%.

However, this has not been the case. The year-on-year growth rate of housing costs has fallen from a peak of 8.1% in 2023 but still remains above 5%.

The year-on-year housing cost rate in August actually rose from 5.1% in the previous month to 5.2%. Before the pandemic, housing costs grew moderately at around 3% annually.

BeiChen Lin, an investment strategist at Russell Investments, said: "One thing to note is housing inflation, although progress by the Fed in this area has been slow, we believe that over time, housing inflation will also normalize."

Automobile Prices

Most forecasters expect that after a few months of decline, used car prices will rebound. This will put pressure on core commodity prices.

Economists at Pantheon Macroeconomics believe that future higher container shipping prices may have an impact on this category.

Samuel Tombs and Oliver Allen wrote on Tuesday: "Transport costs will lag at least six months before reflecting in the CPI, so in the coming months, the impact of this year's nearly doubled container freight rates may gradually be reflected in core commodity prices in the CPI "

Transportation service fees (including car insurance, maintenance, and airfare) have been another inflation hotspot.

The prices of these transportation services are still growing at an annual rate of close to 8%. This number has decreased from the peak of 15% nearly two years ago, but it is still much higher than the average level of 1.8% between 2010 and 2019.

If the data align with expectations, they are unlikely to have much impact on the Federal Reserve's policy decision in November.

Anna Wong, Chief U.S. Economist at Bloomberg Economics, wrote in a report on Thursday, "Even if core CPI exceeds expectations, we believe the September report will not change the Federal Open Market Committee's view of the downward trend in inflation," she expects the Fed to cut rates by 25 basis points in November.

Strong Wages

Economists say that wages, a key driver of consumer spending, pose another upside risk for inflation. Real wage growth in August was the highest in a year. With nearly 50,000 dockworkers negotiating significant pay raises and 33,000 Boeing employees currently on strike to negotiate wage agreements, wages may pose greater upside risks for inflation in the future.

Veronica Clark and Andrew Hollenhorst, economists at Citigroup, wrote in a report on Tuesday, "The continued strength of wages will be a clear upside risk for inflation, especially in service industries such as healthcare."

Impact on PCE

If used car prices rise, it will be bad news for consumers, especially when combined with the persistently high inflation in car insurance. However, the impact on the Federal Reserve's favored inflation gauge —the Personal Consumption Expenditures Price Index (PCE)—will not be significant. The index is trending towards the Fed's 2% target.

Economists at Morgan Stanley led by Diego Anzoategui wrote last week, " Used cars have a low weight in core PCE, so their accelerated growth has a relatively small impact on PCE. Used cars account for about 2% of the CPI basket, while they make up 1.2% in the PCE basket."

Gold Technical Analysis

Even as gold prices closed below the key 21-day Simple Moving Average (SMA) support level at 2619 USD on Wednesday, bulls continue to defend their positions.

With the 14-day Relative Strength Index (RSI) still above the 50 level, gold bulls remain hopeful for a potential reversal.

On the downside, the primary support level is seen at the 2600 USD mark. If this level continues to break, the downward trend may extend to the September 20th low of 2585 USD.

On the other hand, gold prices need to reclaim the 21-day SMA support-turned-resistance level at 2623 USD to revive the uptrend. The next bullish targets are at the psychological level of 2650 USD and near the short-term high of 2670 USD.

"