Consumer prices in the U.S. rose as anticipated in October, and the momentum for reducing inflation has decelerated since the middle of the year, which may lead to fewer rate cuts from the Federal Reserve in the upcoming year.
According to the Labor Department’s announcement on Wednesday, the consumer price index (CPI) climbed 0.2% for the fourth consecutive month. Over the 12 months leading up to October, the CPI increased by 2.6% after a 2.4% rise in September. These headline figures were in line with projections from economists surveyed by Reuters. The rise in yearly inflation also indicates last year’s low figures are now excluded from the calculations.
The CPI excluding food and energy gained 0.3% in October, maintaining the same increase for three months in a row. For the 12 months ending in October, the core CPI advanced 3.3%, following a similar increase in September.
STOCKS: U.S. stock index futures rose by 0.2%, suggesting a stable opening for Wall Street. BONDS: The 10-year U.S. Treasury yield decreased to 4.378%, while the two-year yield dropped to 4.273%. FOREX: The dollar index fell further by 0.2%, and the euro increased by 0.16%, showing some strength.
ELLEN ZENTNER, CHIEF ECONOMIC STRATEGIST, MORGAN STANLEY WEALTH MANAGEMENT, NEW YORK
“There are no surprises from the CPI, so for the moment, the Fed appears set to implement rate cuts again in December. However, next year could unfold differently due to uncertainty around potential tariffs and other policies from the Trump administration. Markets are already considering the chance that the Fed will reduce rates fewer times in 2025 than initially expected and may pause as soon as January.”
“The concern was that inflation figures might come in higher, prompting the Fed to rethink its rate reduction plan, and the market is already anxious about inflation threats for 2025 under a new administration. Thus, the fact that the results aligned with expectations offers a moment for the markets to stabilize and concentrate on other recent influences. Any unexpected inflation uptick would disrupt the prevailing market narratives, which posit that the Fed will keep cutting rates, benefiting risk assets.”
“The new CPI figures matched forecasts, indicating a year-over-year rise of 2.6%. Inflationary trends have continued in crucial sectors such as housing, transportation, and electricity, while notable relief has stemmed from decreased oil and gas prices. Talks of ‘reflation’ have re-emerged, with expectations persisting due to anticipated Trump economic policies. Furthermore, futures currently reflect about a 60% chance of another rate cut in December, following the cumulative 75 basis points already cut at the last two FOMC sessions.”
“There’s nothing in the data suggesting that inflation is re-accelerating or rising again. Consequently, the market is responding to the relief that inflation, at the very least, appears stable, if not slightly declining month-to-month.”
“When 10-year Treasury yields approach 4.4% or 4.5%, more buyers tend to step in. As yields rise into the high fours, that’s when serious impacts on the broader economy may occur if those rates persist. We foresee yields remaining within the four to four-and-three-quarters range for the next several months.”
“A significant portion of the increase in yields reflects ongoing economic robustness and the perception that the Fed doesn’t need to cut rates as much as once believed to prop up what was seen during the summer—a slowing economy. Recent statistics have indicated some stabilization and growth, suggesting sustainability. Yet, considerable uncertainty lingers surrounding this outlook, especially regarding potential policy shifts post-election. Currently, the market is operating under many assumptions about the future policy mix, but clarity remains elusive for where things will stand one or two years from now.”
“The alignment of the CPI data with expectations alleviated some pre-report market anxieties. We’re witnessing Treasury yields decline, which is a positive sign and aids stock futures.”
“The in-line figure is allowing the market to relax slightly and to concentrate more on the benefits of reduced regulation and a potential business uptick.”
“I do not believe this report will influence the December FOMC gathering, and that seems to be what the market is responding to as well. At present, we are heading toward another rate cut. While that path could face interruptions, it appears we are on track for another cut.”
SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT (by email)
“In light of the anxiety surrounding the more inflationary elements of Trump’s policy agenda, the markets seemed positioned for an inflation surprise today. A higher-than-expected inflation figure could have persuaded the Fed to hold rates steady at the next meeting, making the in-line result nearly a victory. A December rate cut is still on the table.”
“However, with policymakers being particularly cautious about the risk of renewed inflationary pressures, especially given the ongoing strength of the U.S. economy and the potential Trump policy agenda, the Fed will likely have to adopt a careful approach. The growing likelihood is that, by early 2025, instead of cutting rates at every meeting, the Fed may opt for a slower pace, reducing rates every other meeting.”
