Will the rise in CPI break the expectation of interest rate cuts? Will the Federal Reserve adjust the pace of rate cuts?

The data released by the U.S. Bureau of Labor Statistics on Thursday showed:

In September, the Consumer Price Index (CPI) rose 2.4% year-on-year, a slowdown from the previous 2.5%, but above the expected 2.3%, marking the lowest level since February 2021, primarily due to declining energy priCES. Month-on-month, it increased by 0.2%, matching the previous value and exceeding the expected 0.1%.

The core CPI (excluding the more volatile food and energy costs) rose by 3.3% year-on-year, slightly above both the expected and previous values of 3.2%. Month-on-month, it increased by 0.3%, higher than the expected 0.2% and matching the previous value, representing the highest level since March of this year.

It is noteworthy that the super core CPI increased by 4.6% year-on-year, indicating that inflationary pressures still exist.

Higher-than-expected inflation data, combined with last week's strong employment report, could intensify market discussions regarding whether the Federal Reserve will continue to cut rates next month or pause. The Fed plans to cut rates by another half percentage point by the end of the year, and many are focusing on labor market dynamics. Following the data release, U.S. equity futures and Treasury yields fell, while the dollar remained relatively unchanged. Traders have increased bets on a 25 basis point rate cut by the Fed next month.

Details of inflation in goods and services:

• Goods Inflation: Prices for goods that had previously been declining rose in September. Prices for new cars, used cars, clothing, and furniture all increased, leading to a rise in core goods inflation for the second time since June 2023.

• Food Inflation: Food prices rose by 0.4% month-on-month, higher than the 0.1% in August, with grocery prices increasing by 0.4% after remaining flat in August. Does the rise in CPI break the expectations for rate cuts? Will the Federal Reserve adjust its rate cut pace?
  

• Housing Inflation: Housing inflation has slowed, with overall housing costs rising by 0.2%, a significant drop from 0.5% in August. The Owners' Equivalent Rent (OER) index rose by 0.3%, down from 0.5% last month. Hotel prices fell, far less than the expected sharp increase.
  
  

• Services: Prices for auto insurance, healthcare, and airline tickets rose significantly, with ticket prices for sports events increasing by 10.9%. Core service prices, excluding housing and energy, rose by 0.4% month-on-month, the largest increase since April this year, marking the third consecutive acceleration.

Future Policy Direction of the Federal Reserve:

After a significant rate cut of 50 basis points in September, there is internal debate within the Fed regarding the future pace of cuts. Some officials are inclined toward a gradual approach to rate cuts. Following the release of the September CPI data, market bets on a 25 basis point cut by the Fed in November have increased, with expectations for a gradual reduction in the upcoming meetings.

Outlook:

Based on current inflation and employment data, the Federal Reserve is likely to continue with small cuts of 25 basis points in the coming months. Although inflation has exceeded expectations, falling energy prices have provided some support for the overall CPI, and the slowdown in housing inflation has alleviated some pressures. The Fed's goal is to keep inflation around 2%, so the current core inflation still being relatively high may prompt a cautious easing policy. Next month's employment data will be a key factor; if the labor market performs strongly, the Fed may delay further cuts. However, overall, a gradual rate-cutting trend is expected to continue until inflationary pressures are significantly alleviated.