Key Points

  • Excluding volatile food and energy prices, the U.S. core Consumer Price Index (CPI) rose 3.3% year-over-year in September, higher than expected, further supporting predictions that the Federal Reserve will limit its main interest rate cut to 25 basis points at next month's meeting.
  • Rising costs for housing, clothing, car insurance, healthcare, and airfare drove the increase in core CPI. Data released by the U.S. Bureau of Labor Statistics on Thursday showed that overall inflation, including food and energy, rose 2.4% year-over-year in September, also above the Fed's 2% target.
  • Olu Sonola, Head of U.S. Economic Research at Fitch Ratings, said in an email: "Inflation is receding, but it has not disappeared." He expects a 25-basis-point rate cut next month and advises that "a December cut should not be taken for granted."

In-Depth Analysis

The Federal Reserve cut the federal funds rate by 50 basis points to a range of 4.75% to 5% on September 18. This decision drew dissenting votes, and minutes from the meeting released on Wednesday showed that some central bank officials believed the first rate cut since 2020 should have been only 25 basis points.

The minutes stated: "Some participants indicated that they would have preferred a 25 basis point reduction of the target range at this meeting, while a few others indicated that they could have supported such a decision."

Support within the Fed for the 50-basis-point cut was not unanimous, and combined with unexpectedly strong U.S. employer hiring data released on Friday, market expectations for another 50-basis-point cut at the two-day monetary policy meeting ending November 7 have largely faded.

According to the CME FedWatch tool, over the past week, interest rate futures traders have lowered the probability of a 50-basis-point cut at the Fed's November 6-7 meeting from 32% to 0%, and now see an 82% probability of a 25-basis-point cut.

New York Fed President John Williams did not mention the new report on persistent inflation in his speech on Thursday. Williams said: "Inflation is close to our 2% target." He also serves as vice chair of the Federal Open Market Committee (FOMC), the policy-setting body.

Williams said: "I expect that it will be appropriate over time to move monetary policy stance to a more neutral setting," referring to an interest rate level that neither stimulates nor slows economic growth. "The timing and pace of future rate adjustments will depend on the evolution of the data."

Chicago Fed President Austan Goolsbee also expressed confidence that price pressures are moving back toward the central bank's target. In an interview with CNBC on Thursday after the CPI data release, Goolsbee said: "We don't need to be overly nervous about one report; these data series are volatile in themselves." He said: "The overall trend is what matters, not daily fluctuations. The overall trend over the past 12 to 18 months clearly shows that inflation has fallen significantly."

In recent days, most Fed officials have echoed comments made by Fed Chair Jerome Powell on September 30, emphasizing that the central bank intends to lower borrowing costs gradually. In a webcast for the National Association for Business Economics, Powell said the FOMC is "not in a hurry to cut rates quickly." In response to questions, he said: "If the economy slows more than expected, we can cut rates faster; if it slows less than expected, we can cut slower. What we are focused on is a process that takes time to unfold, not something that requires rapid action."