Consumer Price Index inflation data to be released on October 10 is expected to provide some support for the Federal Open Market Committee cutting rates in November. However, unemployment data may ultimately matter more for the FOMC’s decision making.
Recent Inflation Data
All inflation metrics are down over the past 12 months according to the Atlanta Fed’s Dashboard that measures a range of inflation metrics. Specifically, headline annual CPI inflation is 2.5% to August 2024 and core CPI, which removes swings in food and energy prices is 3.2%.
Although these figures do not hit the FOMC’s 2% inflation goal, inflation is running at a much lower rate than for much of the 2021-2023 period. As a result the FOMC made the first interest rate cut of this cycle in September, recognizing that monetary policy no longer needed to be as restrictive with significant progress on inflation.
What To Expect
Inflation nowcasts from the Cleveland Fed call for reassuring inflation data. They expect 0.1% monthly inflation for headline CPI for September and 0.3% monthly core inflation. Should these forecasts hold, they would provide further reassurance for the FOMC that inflation is now under control. However, some minor concerns remain.
Firstly, shelter costs, which make up a large portion of CPI inflation continue to rise at a relatively fast 5.2% annual rate as of August 2024. Reaching the FOMC’s 2% target may require shelter costs to cool from these levels. Secondly, the FOMC continues to monitor for unexpected shocks that could cause inflation to resume. For example, the dockworkers’ strike ending with a substantial pay increase recently is the sort of thing the FOMC will be monitoring, to make sure wage-lead inflation doesn’t resume.
Employment Taking Center Stage
Inflation was among the more closely watch economic indicators in recent years, given the surge in prices. Now, the FOMC is paying closer attention to the other component of its dual mandate – maintaining full employment. Typically, when the FOMC raises rates abruptly, increases in unemployment result. We’ve seen that to some degree this cycle with unemployment now at 4.1% for September compared to 3.8% in September 2023. However, so far the increase in unemployment has been sufficiently gradual, so far, to ease fears of a potential recession. Still, jobs data is likely to get more attention than inflation data should inflation continue to ease back towards 2%.
FOMC Decision Making
The FOMC next sets interest rates on November 7. Therefore, the October 10 figures will be the last CPI release before that meeting. However, there will be a Personal Consumption Expenditures Price Index release on October 31, which may offer further insight on U.S. inflation trends.
It is expected that the FOMC elects to cut interest rates by 0.25% according to the CME FedWatch Tool, with some chance that rates are held steady. Previously, markets anticipated a material chance of a larger 0.5% cut. However, that probability has faded with unexpectedly robust jobs data for September, with the economy adding a higher than expected 254,000 jobs. Should inflation continue to cool, so it is likely that the FOMC continues to cut rates. However, the pace of loosening monetary policy may be more informed by jobs data than inflation figures.