Inflation Stable in September: Fed's Next Move

Inflation data for September 2024 showed prices rose as expected, with the Consumer Price Index (CPI) increasing by 0.2% month-over-month and 2.4% year-over-year. This marks continued progress toward the Federal Reserve's (Fed) 2% target. Core CPI, excluding food and energy, rose by 0.3% MoM and 3.3% YoY, accelerating for the first time in one and a half years. While energy and gasoline prices contributed to a lower headline annualized inflation reading, shelter and food prices drove over 75% of the monthly increase. The uptick in core CPI reminds us that inflation pressure hasn't fully dissipated, which should keep the Fed on a gradual pace of rate cuts going forward.


The Fed's response to the September inflation data will likely reinforce market expectations for a continued slowdown in interest rate hikes. With the CPI coming in line with expectations, the Fed may ease off its aggressive tightening stance, potentially pausing rate hikes in the near future. This could lead to a relief rally in equities, particularly in sectors sensitive to interest rates like technology and consumer discretionary. However, the Fed's commitment to fighting inflation may still keep rates higher for longer, maintaining a cautious tone in the market.


Based on the recent inflation data, sectors most affected by the Fed's decision are likely to be those sensitive to interest rate changes, such as financials and real estate. Additionally, industries with high input costs, like energy and materials, may face increased scrutiny. The latest inflation data, showing prices rose as expected in September, may temper the Fed's concerns over the labor market. While policymakers have expressed worries about rising risks in the labor market, the jobless claims figures follow the damage from Hurricane Helene and a Boeing workers' strike, which could be temporary factors. The slowdown in shelter price growth, a significant contributor to core inflation, also indicates easing price pressures. This data suggests that the labor market may be cooling to a level around full employment, aligning with the Fed's assessment of the overall trend in inflation and the job market over the past 12 to 18 months.

The September 2024 CPI inflation data showed a 2.4% year-over-year increase, aligning with the Fed's 2% target. However, core CPI, excluding food and energy, rose 3.3% YoY, indicating persistent price pressures. The Fed may maintain a gradual pace of rate cuts, focusing on balancing inflation and economic growth. Investors should monitor central bank policies and adjust portfolios accordingly, considering sectors with defensive characteristics and companies with strong balance sheets and cash flow generation.