September’s consumer price index (CPI) will serve as the latest test of whether inflation will continue to ease as the Federal Reserve debates its next interest rate decision.
The report, due at 8:30 a.m. ET on Thursday, is expected to show headline inflation at 2.3%, a decline from August’s 2.5% annual rate, marking the lowest annual rate since the start of 2021. In the previous month, consumer prices are expected to have risen 0.1% from the 0.2% increase seen in August.
On a “core” basis, which strips out the more volatile costs of food and gas, prices are expected to have risen 3.2% in September from a year earlier, unchanged from August’s increase. Economists expect the monthly core price increase to ease slightly, compared with a 0.3% gain in August, according to Bloomberg data.
Inflation, though modest, remains above the Federal Reserve’s 2% target on an annual basis.
But the Federal Reserve has recently surprisingly turned its attention to the state of the labor market in the face of higher interest rates.
Data from Bureau of Labor Statistics The labor market released on Friday added 254,000 payrolls in September, more than the 150,000 economists had expected, while the unemployment rate fell to 4.1% from 4.2%.
The strong report changed expectations with markets about the path forward for interest rates Now pricing A smaller 25 basis point cut in November rather than another jumbo 50 basis point cut.
Read More: What Fed Cuts Mean for Bank Accounts, CDs, Loans and Credit Cards
“We think the odds are high that the Fed will not cut interest rates in November,” Citi economist Veronica Clark wrote in a note to clients on Monday. “Ultimately, the authorities will cut rates by 50bp in December after a small 25bp cut in November as a more subdued inflation backdrop and weaker labor market trends re-emerge over the next few months.”
A hot reading could still spook the markets.
“Good news is good news for stocks as long as inflation doesn’t pick up again,” Bank of America equity strategist Ozung Kwan wrote on Monday. Following last Friday’s employment report, we believe the CPI has increased in importance this week.
“While stocks could withstand a small upside surprise in inflation, with improving macro data, a sizable surprise could bring uncertainty to the easing cycle and more volatility in the market,” he warned.
Sticky accommodation, essential services
Core inflation has remained stubbornly high due to higher costs of shelter and essential services such as insurance and medical care.
“We see some risk of stronger inflation in larger components such as owners’ equity rents compared to our forecasts,” Citi’s Clarke said. Owners’ Equitable Rent is the hypothetical rent a homeowner would pay for the same property.
Bank of America pegs rental inflation and a pick-up in home stays, used car prices and airfares, which will translate to a firmer headline reading in September after seeing price declines in August.
“We expect core CPI to be on the firm side of the latest readings in September, and our forecast for inflation remains unchanged from our medium-term outlook,” Bank of America economists Stephen Juno and Jesse Park wrote in a preview of the data. “Inflationary expectations combined with a cooling labor market should keep inflation on track.”
“There are some downside risks to consider, including East Coast port strikes, rising oil prices and higher shipping costs,” the duo added. “We think these risks will contribute to a more gradual inflationary process than we currently expect.”
Alexandra Canal Senior reporter at Yahoo Finance. Follow her on X @alli_kanal, LinkedIn, and email [email protected].
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