New data on US inflation has generated mixed reactions from analysts as September’s report revealed both encouraging and concerning trends.
While headline inflation decelerated for the sixth consecutive month, the uptick in core inflation surprised markets, suggesting persistent underlying inflationary pressures.
“The September inflation reading surprised markets with figures that exceeded expectations across the board, generating a subtle yet important shift in monetary policy expectations,” Quasar Elizundia, Expert Research Strategist at Pepperstone commented.
Elizundia pointed out that while headline inflation slowed to 2.4%, slightly above the expected 2.3%, core inflation—which excludes volatile food and energy prices—rose to 3.3%, up from the expected 3.2%. This marked the first acceleration in core inflation since the first quarter of 2023.
“This increase reflects persistent inflationary pressures in key sectors, posing a significant challenge for monetary policymakers,” Elizundia added.
The data has increased the probability of a 25 basis point rate cut by the Federal Reserve at its November meeting, now seen at 88%, up from 80% earlier.
Labor market uncertainty
The inflation report coincided with an unexpected rise in initial jobless claims, which hit 258,000—the highest level in 14 months. This rise in claims contrasts with the strong jobs report for September, introducing uncertainty about the labor market’s health. Elizundia emphasized, “Although this metric tends to be volatile, the unexpected rise introduces a new layer of uncertainty to the economy.”
Bank of America analysts echoed similar concerns, noting that while inflation remains “sticky,” the labor market’s softening could warrant caution. “Headline CPI rose 0.2% month-over-month, and core increased by 0.3%...The report shows some stickiness on inflation, but we are not yet worried about reacceleration risks.” However, they acknowledged that core inflation’s rise was driven by firmer goods prices, a trend that might not persist.
Mixed signals for the Fed
The inflation data and labor market trends have complicated the Federal Reserve’s decision-making process. According to Chris Beauchamp, Chief Market Analyst at IG: “Today’s US inflation data was quickly discarded in favor of a focus on the rise in jobless claims.”
Beauchamp noted that while inflation remains a concern, the growing uncertainty in the labor market could make the case for a more substantial rate cut in the coming months. “A few more weeks of rising claims could see the case for a 50 basis point cut revived,” Beauchamp added.
Kathleen Brooks, research director at XTB, also highlighted the challenges facing the Fed.
“Today’s US inflation report was good, but not good enough to dispel fears that US inflation could reignite in the coming months,” Brooks said.
Market reactions
US markets reacted cautiously to the inflation report, with equities declining by 0.2% on average. The dollar initially spiked but later retreated, while bond yields showed minor fluctuations.
“The yield curve is steepening, which is supportive of a strong economy,” noted Brooks, though adding that the markets continue to underprice inflation risks.
Overall, analysts agree that while inflation has moderated, the unexpected rise in core inflation and jobless claims adds uncertainty to the economic outlook. As the Federal Reserve gears up for its November meeting, the debate over whether the US economy is heading for a “soft landing” or a more turbulent scenario continues to intensify.