October CPI Preview: Upward Inflation Will Break Optimism, Challenging Fed's Future Path Amid Trump's Comeback

The October CPI data will be released tonight at 8:30 ET. Market participants predict that this latest data will show core inflation remaining resilient for the third consecutive month, making the pace of the Federal Reserve's rate cuts in the coming months a focal point of debate.

Due to the low base effect from last year, the U.S. October CPI is expected to increase by 2.6% year-on-year, higher than the 2.4% increase in September; the month-on-month increase is expected to be 0.2%, unchanged from the previous one. Core CPI may continue its relatively sticky performance, growing by 3.3% YOY, the same as in September, with the MoM growth rate remaining at 0.3% for the third consecutive month, thereby significantly pushing the three-month annualized growth rate from 3.0% to 3.6%.

The U.S. October CPI data may weaken expectations for a Fed rate cut in December. There is an upside risk to the overall inflation month-on-month indicators, while core inflation appears to remain relatively high. Economist Scott Johnson said.

If the U.S. October CPI data comes in below expectations, indicating that overall inflation is currently under control, U.S. Treasury yields and the dollar may come under pressure; if the CPI data shows an unexpected rebound, it could trigger market concerns about a resurgence of high inflation, potentially hindering the pace of future rate cuts, with U.S. Treasury yields and the dollar continuing to rise, stocks also under pressure.  

Federal funds futures show that the probability of the Fed cutting rates by 25 basis points in December has dropped to around 65%. At the same time, the market is beginning to consider the possibility of ending the current easing cycle by mid-next year, nearly a year ahead of the FOMC's September forecast.

There are several key components in this upcoming inflation data worth noting. First is rent. Owners' equivalent rent (OER) is the largest single component of the CPI and is crucial for determining the underlying trend of this indicator. OER inflation accelerated in July and August, raising concerns that the inflation slowdown trend in the first half of the year would reverse, and then slowed again in September.

Economists at Morgan Stanley, led by Diego Anzoategui, believe that OER may see a slight increase again in October before resuming its downward trend. OER decline in September may have been influenced by seasonal factors, which we do not expect to see this time. However, leading indicators in our model—new leases and renewals—remain weaker than housing CPI, indicating continued deceleration ahead. They wrote. 

Second is hotel prices. Even if rent inflation remains stable, hotel prices are expected to be affected by hurricanes, which could lead to a significant increase in the away-from-home accommodation category in the CPI. Analysts also noted that the U.S. Bureau of Labor Statistics has seasonally adjusted this item to account for the slowdown in business after the summer travel peak, meaning that unadjusted prices would need to drop significantly to show a decline in seasonally adjusted price readings.

Barclays economists Pooja Sriram and Marc Giannoni stated, based on high-frequency data on average room rates, we predict an increase in away-from-home accommodation prices...Costar's weekly reports indicate higher demand and occupancy rates in the Southeast in October due to displacement caused by hurricanes, while keeping in mind the daunting seasonal factors in October.

Also worth watching are used car prices. Hurricanes may also have driven up used car prices, which is one of the most important commodity categories in the CPI index. Over the past 16 months, prices in this category have fallen in 14 months, helping to lower overall core goods prices. Excluding used cars, core goods prices have been mixed, with declines in only 9 out of the past 16 months.

Wells Fargo economists Sarah House and Aubrey Woessner wrote: the recent rebound in used vehicle auction prices suggests that the used vehicle CPI may see the largest monthly increase in about a year. We still believe that the benefits of smoother supply chains and weaker demand have not yet fully materialized, but the deflationary impulse for new and used cars may fade in the last few months of this year, especially as hurricane damage drives demand for replacement vehicles and parts.

Conclusion

The October CPI data release will be closely watched to gauge the trajectory of inflation and its implications for Federal Reserve policy. Core inflation is anticipated to remain resilient, which could challenge the Fed's plans for rate cuts in the coming months. Key components such as rent, hotel prices, and used car prices are expected to play significant roles in the overall inflation picture. The data's impact on U.S. Treasury yields, the dollar, and stock markets will depend on whether inflation comes in above or below expectations, and may hit the current bull market momentum. Be ready for the storm!