U.S. inflation cools, but core prices stay sticky

U.S. inflation slowed to 2.4% in September, marking the sixth consecutive month of easing. However, core prices, driven by food and shelter costs, remain elevated, suggesting the Fed will maintain a cautious approach on rate cuts

10 October 2024

Market close
  • US CPI rises more than forecast; core measure also higher

  • Food and shelter costs stoke hotter-than-expected CPI

  • Jobless claims jump 258,000, exceeding estimates

The annual inflation rate in the United States eased for a sixth consecutive month in September, falling to 2.4%, the lowest level since February 2021, from 2.5% in August, according to data released on Thursday. Despite the moderation, rising costs for food and shelter pushed the Consumer Price Index (CPI) higher than anticipated, highlighting underlying inflationary pressures.

The latest inflation print underscores a mixed picture. While a sharp drop in energy prices helped cool overall inflation, the persistence of elevated prices in core categories, excluding food and energy, points to a more entrenched price-growth environment. Without the steep decline in energy costs, this inflation report would likely be seen as a case of “sticky” inflation.

Market participants, heavily positioned in long stocks, bonds, and rates futures, are not prepared for a resurgence in inflation. While inflation has slipped down the list of immediate market concerns, it remains a risk that could catch investors off guard. Structural price pressures are still elevated, and core consumer prices continue to hover above 3%—a sign that it may be premature to sound the all-clear on inflation.

The overall trend is still leaning towards disinflation, but persistent strength in services inflation indicates that the battle against rising prices is far from over. Following a stronger-than-expected September jobs report, the latest CPI release bolsters the Federal Reserve’s case for a cautious approach in its policy stance. While markets are still largely betting on a quarter-point rate cut in November, the odds of a December cut are less certain.

Swaps traders now see an 85% chance of a 25-basis-point cut in November, up from around 80% earlier in the week. It is noted that while market optimism for a rapid easing cycle may have been overly enthusiastic, a gradual series of rate cuts remains the most likely scenario in the months ahead.

Meanwhile, initial jobless claims rose by 258,000 last week, a figure likely distorted by recent hurricane impacts and other temporary factors. Despite this uptick, the labor market remains relatively robust, further complicating the outlook for the Fed as it weighs its next policy steps.