Inflation Stayed Stubborn In October

Consumer prices rose steadily in October, at a pace likely modest enough to keep the Federal Reserve on course to cut interest rates again.

The cost of living, as measured by the Consumer Price Index (CPI), rose 2.6% over the year ending in October, up from a 2.4% annual increase in September, the Bureau of Labor Statistics said Wednesday. The increase matched the expectations of forecasters surveyed by Dow Jones Newswires and The Wall Street Journal.

Despite the uptick as measured year-over-year, details of the report showed inflation has been fairly stable for the past few months. Measured on a month-to-month basis, prices rose 0.2% in October from September, the same rate as July, August, and September. “Core” inflation, which excludes volatile prices for food and energy, rose 0.3%, the same as in the previous two months.

Most of the inflation in October came from housing. Shelter costs rose 0.4% in October after increasing 0.2% in September.

The inflation rate has cooled this year and, by some measures, is tantalizingly close to the Federal Reserve’s benchmark of a stable 2% annual increase. It’s also slowed down significantly from the post-pandemic surge of price increases, which peaked in June 2022. Fed officials have said they’re confident that inflation is on a firm downward trajectory.

Does CPI Change the Outlook For The Fed?

Wednesday’s inflation data shed light on household budgets and has implications for borrowing costs on all kinds of loans in the coming months.

Lower inflation could spur the Fed to cut its key fed funds rate, which influences interest rates on credit cards, mortgages, and other loans. The Fed cut the rate from a two-decade high in September and followed that up with another rate cut in November. With the cuts, central bankers aim to encourage more borrowing and spending to boost the economy.

Any signs of inflation running hotter than expected could make the Fed hold off on further rate cuts. However, economists said the October data matching expectations would likely encourage Fed policymakers to continue cutting rates.

“Bang in-line core inflation leaves the Fed on track to cut rates in December,” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, wrote in a commentary. “After a run of unseasonably hot autumn data, today’s number cools fears of an imminent slowdown in the pace of rate cuts.”

Financial markets increased their bets on a rate cut at the Fed’s next meeting in December. Late Wednesday morning, traders priced in an 82% chance of a December rate cut, up from 59% the day before, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

However, the changeover in presidential administrations introduces some uncertainty about the path of inflation and Fed rate cuts over the coming months. Economists and financial markets generally believe incoming president Donald Trump’s economic agenda of tax cuts and trade tariffs could stoke inflation and discourage the Fed from cutting borrowing costs further.

“With uncertainty over fiscal and trade policies high, there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in,” Rosner said.