Across the board exceeding expectations! US September CPI rose 2.4% year-on-year, with core CPI increasing by 0.3% month-on-month

The stagnation of US inflation in September, with both overall CPI and core CPI exceeding expectations.

The US Bureau of Labor Statistics released data on Thursday:

In September, the US CPI rose by 2.4% year-on-year, slightly slower than the previous value of 2.5%, but exceeded the expected value of 2.3%, the lowest level since February 2021, mainly due to the decline in energy prices; it rose by 0.2% month-on-month, unchanged from the previous value, exceeding the expected value of 0.1%;

The US core CPI in September (excluding volatile food and energy costs) rose by 3.3% year-on-year, slightly exceeding the expected and previous value of 3.2%; it rose by 0.3% month-on-month, slightly higher than the expected 0.2%, unchanged from the previous value, the highest level since March.

It is worth mentioning that the so-called super core CPI also rose, with a year-on-year growth of 4.6%.

Higher-than-expected inflation data, coupled with the strong performance of the US employment report last week, may intensify discussions on whether the Federal Reserve will choose to make a slight rate cut next month or pause after a significant rate cut in September. The Fed plans to cut rates by half a percentage point before the end of the year, with many focusing on the dynamics of the labor market.

After the data was released, US stock index futures and US Treasury yields fell, while the US dollar remained almost unchanged. Traders are betting that the likelihood of a 25 basis point rate cut by the Fed next month is higher.

Commodity inflation turns from decline to rise, food inflation accelerates

From the perspective of various sub-items, housing and food inflation contributed to over 75% of the overall increase, with commodity prices rising after steadily declining over the past year.

In terms of food, food inflation accelerated in September, with food prices rising by 0.4%, slightly higher than the 0.1% in August; after remaining flat in August, grocery prices rose by 0.4% in September.

Regarding housing, housing inflation slowed down in September, with overall housing costs rising by 0.2% month-on-month, a significant drop from the 0.5% increase in August, and the year-on-year increase continued to decline. The Owner's Equivalent Rent (OER) index rose by 0.3%, showing a slower increase compared to the previous month's 0.5%. Hotel prices fell, far below expectations of a significant increase.

New car, used car prices, as well as clothing and furniture prices have all risen, leading to the so-called core commodity inflation rising for the second time since June 2023.

In the service sector, prices of car insurance, healthcare, and air tickets have significantly increased; sports event ticket prices hit a record high of 10.9%, partly due to the start of the football season. Excluding housing and energy, core service prices rose by 0.4% month-on-month, the largest increase since April and the third consecutive acceleration, marking the longest duration since the beginning of 2023.

Will the Fed slow down rate cuts in November?

Previously, due to persistent inflation decline and a series of weak labor market data, the Fed started cutting rates in September, with a substantial 50 basis points cut. Minutes from the meeting released on Wednesday showed intense debate over the size of the rate cut, with officials indicating a preference for a gradual approach to cutting rates.

Following the release of CPI data, traders increased bets on a 25 basis points rate cut by the Fed next month, while also starting to unwind bets on the Fed pausing rate cuts in November. It is currently expected that the Fed will cut rates by 25 basis points at the upcoming meetings.

Analyst Jamie Cox from Harris Financial Group stated:

The process of inflation easing is still ongoing, but anyone thinking the Fed will cut rates by another 50 basis points in November is sorely mistaken. When rates are not high enough to dampen economic growth, they are not high enough to fully suppress inflation. While the Fed will lower rates, it will do so at a moderate pace from now on.

Analyst Michael Brown from Pepperstone mentioned that despite higher-than-expected US inflation data in September, it is unlikely to substantially alter the policy outlook of the FOMC. He noted:

Despite stronger-than-expected September employment reports and ongoing progress against inflation, it is expected that the remaining two FOMC meetings this year will each cut rates by 25 basis points, a pace that may continue until 2025, until the federal funds rate returns to a neutral level of around 3% by next summer. Essentially, this is the "Fed put option," which continues to exist in a strong and flexible form, providing further confidence for participants to move away from the risk curve, while also keeping stock market declines relatively shallow and seen as buying opportunities.

Goldman Sachs stated that next month's employment data is crucial for the Fed's accommodative policy:

The September CPI report was stronger than expected, especially with core CPI unexpectedly rising. However, labor market data remains the key factor for the Fed, and we believe next month's employment data will be a more important data point in determining the pace and extent of the Fed's accommodative measures