Tonight at 8:30 PM, the most important CPI data of the year! Will the rate cut expectations cool down further?

The United States will release the inflation data for September CPI on Thursday, October 10th at 8:30 pm. This is the most significant inflation data before the Federal Reserve's November meeting and the last CPI report before the 2024 U.S. presidential election. Market forecasts indicate that overall inflation in the United States for September is expected to remain moderate, mainly due to the decline in energy prices.

With inflation pressures easing and signs of a cooling labor market emerging, the Federal Reserve began cutting interest rates in September, with an unexpectedly large cut of 50 basis points. Analysts believe that even if the September inflation data continues to improve, it is unlikely to change the Fed's policy path in the long term, but they warn that there are still risks in the inflation outlook. "It looks like the Fed is very satisfied with the current level of inflation and the trend of inflation," said Josh Hirt, Senior U.S. Economist at Vanguard Group, "but we remain cautious, especially in the service sector."

According to FactSet's consensus expectations, economists expect a month-on-month increase of 0.1% in CPI for September, compared to a 0.2% increase in August. This will bring the overall inflation rate down from 2.5% in August to 2.3% year-on-year. Excluding volatile food and energy prices, core inflation is expected to be slightly higher, driven by price increases in used cars, hotels, airfares, and car insurance. Core inflation in September is expected to increase by 0.2% month-on-month and 3.2% year-on-year.

However, analysts emphasize that an unexpected upward trend in monthly inflation data will not change the overall trend of slowing price pressures. Economists at Bank of America wrote last week:

"While we expect core CPI in September to be slightly higher than in recent months, this does not change our expectation for further moderation in inflation in the medium term."

Continuous downward trend in U.S. CPI inflation

Overall CPI vs. Core CPI

The CPI data released on Thursday follows last week's better-than-expected non-farm payroll report. The report showed that the U.S. economy added 254,000 jobs last month. This data significantly exceeded expectations, coupled with upward revisions to data from previous months, easing investors' concerns about economic slowdown.

"We received much stronger data last Friday than expected. Data from the previous months were revised upward, and importantly, the unemployment rate further declined," explained Brian Rose, Senior U.S. Economist at UBS Global Wealth Management:

"Now, the issue of rising unemployment is no longer as worrisome, and the risks in the labor market are not as high as before." According to Hirt, strong employment data means that inflation will once again become a focus for investors and policymakers. "We are indeed seeing more attention back on inflation." Economists at Vanguard Group expect core inflation to rise by 0.24% month-on-month, and overall inflation to rise by 0.10% month-on-month. Senior US economist Hirt from Vanguard Group stated that "although these numbers are a step in the right direction, core inflation is still slightly high."

Service Sector Inflation Risks and Rate Cut Expectations

Hirt particularly focuses on inflation risks from the service sector, mainly due to strong wage growth. He mentioned that the wage growth in the service sector is "still high," which is not entirely consistent with the 2% inflation target.

Analysts at Bank of America also pointed out that risks from rising oil prices and increased freight costs could temporarily push up inflation. Housing costs remain high and are also a major driver of inflation.

The impressive September employment report significantly changed investors' expectations for the Fed's November meeting. Previously, the market expected a 50 basis point rate cut, but now leans towards a smaller rate cut. According to the CME FedWatch Tool, bond market prices indicate an 88% probability of a 25 basis point rate cut in November.

Senior US economist Rose from UBS believes that if inflation data exceeds expectations, it may prompt the Fed to pause rate cuts in November, especially when concerns about whether inflation will return to the target range persist. He stated, "This weakens the argument for 'we must cut rates quickly' because the downside risks to the labor market or unemployment rate no longer seem so scary." As the labor market conditions improve, inflation data "becomes important again."

He believes that core inflation will record between 0.2% to 0.3% month-on-month, which the Fed would find satisfactory, but if it exceeds 0.4%, it could raise more serious concerns and increase the possibility of the Fed keeping rates unchanged in November.