Deep Briefing:

  • Data from the U.S. Bureau of Labor Statistics showed that inflation rose less than expected last month, strengthening market expectations that the Federal Reserve will cut interest rates at its policy meeting this Wednesday (October 29) and at its final meeting of the year in December.
  • The Bureau of Labor Statistics reported last Friday that the Consumer Price Index (CPI) rose 3% year-over-year in September, 0.1 percentage points higher than in August. Excluding volatile food and energy prices, the core CPI also rose 3% year-over-year.
  • Art Hogan, chief market strategist at B. Riley Wealth, said in an email: "This report will clearly keep the Fed on track to cut rates at its October 29 meeting. The Fed has made it clear that they are more focused on softening in the labor market and will continue to defend its full employment mandate, even with core CPI well above the 2% target."

Deep Insight:

According to data from the CME FedWatch tool, interest rate futures traders see a 96.7% probability that the Fed will cut the federal funds rate by 25 basis points from its current target range of 4% to 4.25% on October 29.

In response to the latest inflation data, traders raised the probability of at least a 25-basis-point rate cut by the Fed in December to 96.9%, up from 91.1% on Thursday.

Fed policymakers, who have previously pointed to a softening labor market, cut their key interest rate by 25 basis points last month despite inflation still running well above target. This was their first rate cut of the year.

Tariffs continued to be a driver of inflation last month. Goods sensitive to import taxes led the gains, with prices for apparel, furniture and bedding, and sporting goods rising 0.7%, 0.9%, and 1%, respectively, in September.

"Tariffs continue to exert significant upward pressure on core inflation," Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said in a report. He noted that core goods prices excluding autos rose 0.34% month-over-month, the highest since June.

"Businesses have so far absorbed most of the cost increases from tariffs by compressing profit margins, thereby protecting consumers, but there is a high likelihood of further pass-through in the coming months," he added.

A bright spot in the September inflation data was the modest rise in rents and other housing costs. The Bureau of Labor Statistics said housing prices rose only 0.2%, half of August's increase. The owners' equivalent rent index rose 0.1% month-over-month, the smallest monthly gain since January 2021.

Allen said services inflation "is likely to drift lower, given clear signs of a softening labor market and further room for housing inflation to decline."

He expects policymakers could cut rates by 25 basis points at each of the last two meetings of this year and by a cumulative 125 basis points in 2026.