Key Takeaways:

  • The U.S. Bureau of Labor Statistics reported Thursday that annual inflation unexpectedly slowed to 2.7% in October, down from 3% in September. The agency noted that the federal government shutdown disrupted data collection for six weeks through mid-November.
  • Excluding volatile food and energy prices, the core Consumer Price Index (CPI) rose 2.6% year-over-year in October, compared with 3% in September. Although the BLS calculated annual inflation rates, monthly price changes for 18 of 21 categories, including energy, services, and groceries, were not released.
  • Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said: "The November CPI data must be treated with caution." He noted that the BLS resumed data collection on November 14 and said the inflation "trend will only become clear after December data is released," which is scheduled for next month.

Deeper Dive:

Given the potential distortions caused by the data collection disruption, interest rate futures traders' expectations for a rate cut at the Federal Reserve's next meeting rose only slightly, by about 2 percentage points.

According to the CME Group's FedWatch tool, futures traders see a 26.6% probability that policymakers will cut rates by 25 basis points at their January 27-28 meeting, up from 24.4% on Wednesday.

Earlier this month, policymakers lowered the benchmark interest rate by 25 basis points to a range of 3.5%-3.75%, as concerns about a weakening labor market outweighed worries about inflation persistently running above the 2% target.

In their latest dot plot, Fed officials projected only one 25-basis-point cut in the federal funds rate in 2026. They expect their preferred inflation gauge—the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices—to fall to 2.5% by the end of 2026, 0.1 percentage point lower than the September forecast.

For months, Fed officials have tried to balance so-called "two-sided" risks, as stubborn inflation and a weakening labor market threaten their dual mandate of price stability and maximum employment.

Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid dissented at the recent meeting, advocating for holding rates steady. Fed Governor Stephen Miran dissented, calling for a 50-basis-point cut.

Fed Chair Jerome Powell noted at a press conference following the December 10 policy decision that the missing data collection during the 43-day shutdown could distort inflation data for that period.

Nevertheless, Tombs said the latest CPI data suggests that core PCE inflation in November will slow to 2.7% from 2.9% in September.

"We continue to expect core PCE to decline rapidly in 2026, returning to almost the Fed's 2% target by year-end," he said. "Therefore, if the labor market remains weak, the outlook for the FOMC to continue easing policy next year is clear, although a skip in January is more likely."