September CPI Slightly Higher Than Expected as Solid Services Gain, But 25 bps Cut in November Still Base Case
After stronger-than-expected nonfarm payrolls last week, the September CPI report also showed a slight uptick, breaking the high expectations that inflation may fall more sharply. The CPI came in at 2.4% year-over-year, marginally above the expected 2.3%. On a month-over-month basis, CPI increased by 0.2%. Core CPI, which excludes volatile food and energy prices, also came in hotter than anticipated at 3.3% year-over-year, above the 3.2% forecast, and rose 0.3% month-over-month.
Following the release of the CPI data, U.S. stocks slightly fell. The S&P 500 futures dipped by 0.4%, while the Nasdaq 100 futures fell by 0.6%. Despite the inflation numbers coming in slightly higher than expected, traders fully expect a 25 bps cut in November, with an overwhelming 91% chance, and only a 9% chance of no change.
Shelter costs, which make up over one-third of the CPI, rose by 0.2% in September, a slower pace compared to the 0.5% increase in August. The index for food also saw a notable rise, increasing by 0.4% for the month. Together, these two indexes contributed over 75% of the monthly increase in all items.
Additionally, medical care services and transportation grew by 0.7% and 1.4% month-over-month, respectively, accelerating the services category in core CPI.
The data follows a stronger-than-expected nonfarm payrolls release last week, which showed a surge of 254,000 jobs in September. This was a significant increase from the revised 159,000 in August and well above the 150,000 consensus forecast. The unemployment rate also fell to 4.1%, down 0.1 percentage points.
The mixed signals from the CPI and labor market data present a challenging scenario for the Federal Reserve. On one hand, the slightly higher-than-expected inflation suggests that price pressures remain persistent, particularly in key areas like shelter and food. On the other hand, the robust job market indicates underlying economic strength, which could justify a more cautious approach to rate cuts.