Inflation Higher Than Expected in September, But Fed Rate Cuts Still Likely

Inflation rose slightly more than anticipated in September, according to new data from the Labor Department, potentially complicating the Federal Reserve’s plan to cut interest rates.

The core Consumer Price Index (CPI), which excludes volatile food and energy prices, increased by 0.3% for the second consecutive month. Wall Street analysts had expected a smaller rise of 0.2%.

Over the past year, core inflation edged up to 3.3%, marking its first increase in 18 months. This suggests that inflation remains persistent in certain parts of the economy. The overall CPI, which includes all goods and services, increased by 0.2% in September, also slightly above expectations.

Despite the slight uptick, the annual inflation rate slowed to 2.4%, its lowest level since February 2021. Economists had predicted a dip to 2.3%. The Federal Reserve tends to focus on core inflation as a predictor of future trends, as food and energy prices can fluctuate significantly in the short term.

While inflation remains sticky in some sectors, the Fed is still expected to continue cutting interest rates in the coming months. The central bank has already cut rates by 50 basis points in September, and analysts widely anticipate another 25 basis point reduction in November. The Fed’s next policy meeting is set for November 6-7, just after the US midterm elections.

However, some uncertainty lingers.

“The larger-than-expected gain in September’s CPI doesn’t signal a reacceleration in inflation, nor will it prevent the Fed from cutting rates at its next meeting,” said Ryan Sweet, Chief U.S. Economist at Oxford Economics.

Market traders agree, with most predicting a 25 basis point cut next month.

Rising food prices contributed to the inflation data, with a 0.4% increase in September and a 2.3% rise over the past year. Meanwhile, energy prices fell by 1.9% last month and are down 6.8% compared to a year ago. Despite the inflation news, the Fed is more focused on the labor market and ensuring unemployment does not rise significantly.

As of now, the central bank is working toward achieving a “soft landing” for the US economy, aiming to lower inflation without causing a recession. The latest inflation data, while slightly higher than expected, is unlikely to derail the Fed’s efforts to cut interest rates and guide the economy toward stability.

FOX Business and Market Watch contributed to this report.