Data released by the U.S. Bureau of Labor Statistics on Thursday showed that in September, the U.S. Consumer Price Index (CPI) increased by 2.4% year-on-year, narrowing by 0.1 percentage points compared to the previous month, but higher than the economists' expected 2.3%; it increased by 0.2% month-on-month, which was in line with the previous value and higher than the expected 0.1%.
After excluding the more volatile food and energy costs, the core CPI increased by 3.3% year-on-year, expanding by 0.1 percentage points compared to the previous month; it increased by 0.3% month-on-month, which was in line with the previous value. Both were higher than expectations by 0.1 percentage points.
The Bureau of Labor Statistics stated that the increase in inflation in September was mainly driven by the food and housing markets. Among them, food prices increased by 0.4% month-on-month, and the cost of living, which accounts for about one-third of the CPI, increased by 0.2% month-on-month. Energy prices, however, fell by 1.9% month-on-month, with gasoline prices declining by 4.1%.
The unexpected increase in U.S. inflation in September, coupled with the unexpectedly strong non-farm job gains in the previous month, has significantly increased the uncertainty of a rate cut in November. The interest rate path "dot plot" released by the Federal Reserve after its September interest rate meeting showed that there will be another 50 basis points (0.5 percentage points) cut by the end of the year, that is, a 25 basis points cut in both November and December. At the same time, Federal Reserve officials have also repeatedly stated in recent times that they will closely monitor the development of the labor market.
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Olu Sonola, Head of U.S. Economic Research at Fitch Ratings, pointed out that inflation is receding but not completely disappearing. "The unexpected strength of the September employment data, as well as the latest released CPI report, are prompting the Federal Reserve to be cautious about the pace of easing. There is still a possibility of a 25 basis points rate cut in November, but it should not be taken for granted that there will also be a rate cut in December."
In the early hours of Friday, Beijing time, the FedWatch tool of the Chicago Mercantile Exchange showed that the market currently believes there is an 89.1% chance that the Federal Reserve will cut rates by 25 basis points in November, with a 10.9% chance of keeping rates unchanged; the probability of another 25 basis points rate cut in December is 88.4%.
After the data release, Chicago Fed President Austan Goolsbee said in an interview with CNBC that the CPI data was basically in line with expectations. He emphasized that what is important is the overall trend, not the monthly fluctuations. "Looking at the past 12-18 months, the overall trend is clearly a significant decrease in inflation and the cooling of the job market to what we consider full employment levels," Goolsbee said.
In September, the Federal Reserve cut the benchmark federal funds rate range by 50 basis points to 4.75%-5.0%, taking a "big step" into the rate-cutting cycle. The minutes of the meeting released on Wednesday showed that at this interest rate meeting, Federal Reserve officials had disagreements on the extent of the rate cut, and ultimately decided to cut rates by 50 basis points instead of the usual 25 basis points, largely due to concerns that the labor market might cool down too quickly.
Surprisingly, since the September interest rate meeting, the labor market has shown greater resilience. In September, non-farm employment increased by 254,000 more than expected, and the unemployment rate decreased by 0.1 percentage points month-on-month to 4.1%; the Department of Labor also revised up the employment figures for the previous two months, with the July non-farm employment increase significantly revised up by 55,000 to 144,000. This means that the labor market at the end of summer was not as weak as the Federal Reserve and economists had previously thought. Several officials, including Federal Reserve Chairman Jerome Powell, have indicated that they are not in a hurry to cut rates quickly, but prefer to take a gradual approach to easing monetary policy.
However, another report released by the Department of Labor on Thursday showed that the number of initial jobless claims unexpectedly rose to 258,000 last week, reaching a new high since June last year. Although this was partly affected by Hurricane Helene and the Boeing strike, it also served as a warning bell for the potential weakness in the labor market.After the release of the CPI and initial jobless claims, Whitney Watson, Global Co-Head of Fixed Income and Liquidity Solutions at Goldman Sachs, stated that the September CPI increase exceeded expectations, with core CPI rising particularly unexpectedly. However, employment remains the dominant factor in the Federal Reserve's policy, and the employment data for October will be crucial in determining the pace and extent of the Federal Reserve's easing.
