CPI inflation rose for the first time since March. What impact will it have on rates?
The inflation rate as measured by the Consumer Price Index (CPI) rose 2.6% in October, up from 2.4% in September.
It is the first time in six months that the inflation rate has gone up, dating back to March of 2024, when the CPI went from 3.2% to 3.5%. Since then, it has steadily declined, until October.
The rise was not unexpected as economists had predicted it to come in at 2.6%, so the markets took it mostly in stride, as the major indexes were up slightly in morning trading.
The longer-term question is, what impact will this have on the Federal Reserve and interest rates?
Core inflation stays at 3.3%
For the month of October, inflation rose 0.2%, which was in line with expectations and the same as September. The biggest increase was with used cars and trucks, where prices rose 2.7% in October. In addition, electricity prices jumped 1.2%.
Other notable areas where prices increased were shelter, medical care services, and transportation services, all of which rose 0.4%, as well as airline fares and recreation.
Over the past 12 months, transportation services are up 8.2%, while shelter prices are up 4.8% and electricity prices have risen 4.5%. Also, food away from home has jumped 3.8% while food prices overall are up 2.1% in the last 12 months.
The segments of the economy that saw the largest price decreases were in the energy sector, as fuel oil dropped 4.6%, gas fell 0,9%, and overall energy commodities declined 1%. Apparel, communication, and household furnishings and operations prices also decreased for the month.
Over the past 12 months, fuel oil is down 20.8%, gas is off 12.2%, and energy commodities are 12.4% lower. In addition, used cars and trucks are down 3.4% while new vehicle prices are 1.3% lower.
The core inflation rate, which excludes food and energy costs, is at 3.3%, which is in line with expectations and the same as it was in September. Core CPI rose 0.3% in October, the same as September.
What does this mean for interest rates?
The Federal Reserve lowered interest rates in September and November by a total of 75 basis points as it had made sustained progress toward its 2% annual inflation goal, as measured by Personal Consumption Expenditures (PCE). In September, the PCE came in at 2.15 and the October numbers will be released at the end of the month.
But CPI and PCE have typically moved in tandem, so investors may be wondering if this rise in CPI inflation means that the Fed will pause any potential rate cuts in December?
Speaking Tuesday, before the CPI came out, Minneapolis Fed President Neel Kashkari, in an interview with Yahoo, said that an upside surprise may give the Fed pause.
But in a TV interview Wednesday with Bloomberg, Kashkari said the October CPI data confirms the path the Fed is on, as the 2.6% rise was expected and not a surprise.
Kashkari cited the fact that the goods inflation rate is back down to pre-pandemic levels, services inflation is trending lower, and housing inflation is a lagging indicator that he feels is heading in the right direction.
The market still seems confident in a 25-basis point rate cut in December to the 4.25% to 4.50% range. CME’s FedWatch survey says 82.5% of interest rate traders expect a 25-basis point reduction in December while 17.5% believe rates will stay at the current 4.50% to 4.75% range.
