US CPI Inflation Pulls No Surprises

US CPI Inflation Pulls No Surprises

October's key CPI inflation (Consumer Price Index) metrics aligned with market expectations today.

Data from the Bureau of Economic Analysis (BEA) showed that YY inflation rose to 2.6%, increasing from September’s rate of 2.4% and marking the first upward shift since March.

The recent lack of progress on inflation helps underline the rationale behind the US Federal Reserve (Fed) not declaring victory on inflation. It also reinforces Fed Chair Jerome Powell’s comments at last week’s policy meeting that the job on inflation ‘was not done’ and sheds light on the potentially challenging path ahead as the Fed attempts to steer the economy towards its 2.0% inflation target.

Core YY inflation – stripped of food and energy price components – reported a rise of 3.3%, where it stood in September. Of note, underlying inflation has remained north of 3.0% since April 2021. MM headline and core inflation rose 0.2% and 0.3%, respectively, matching September’s data.

The BEA reported that housing contributed to over half of the rise in headline inflation in October. The shelter index rose by 0.4%, up from a 0.2% increase in September.

Although the energy price index fell by 1.9% in September, it remained unchanged in October. Meanwhile, the food index rose by 0.2% in October, easing from a 0.4% increase in September.

Relief Rally

After the data landed, a relief rally occurred in the bond market as inflation figures met expectations. This comes as markets are on edge regarding Trump’s proposed policies, which include curbing immigration, implementing tariffs, lowering taxes, deregulation, and fiscal stimulus – measures that could lead to increased inflation. Donald Trump’s recent election victory over Democratic candidate Kamala Harris has prompted significant demand for the US dollar (USD), US equities, and US Treasury yields.

Today’s print saw US Treasury yields drop alongside a move lower in the USD, with US equity index futures also catching a modest bid. However, follow-through movement has been lacking across key asset classes.

Regarding money markets, a dovish repricing has been seen, with investors now expecting 21 basis points (bps) of easing compared to 16 bps before the release of inflation numbers.

Bumpy Road Ahead

Although the limited progress on inflation in the last few months could prompt the Fed to slow the pace of rate cuts, investors still believe a 25 bp reduction is likely on the table for December’s meeting.

Dallas Fed President Lorie Logan recently made the airwaves and communicated that the Fed should ‘proceed with caution on rate cuts’. Lori added: ‘It's difficult to be sure how many cuts may be needed and how soon they may need to happen’, which has consequently underpinned a bid in the USD.

However, given we have another CPI inflation report on 11 December, along with PCE data at the end of this month and the US employment situation report on 6 December, and couple this with a cooling labour market, resilient economic activity and robust consumer spending, I do not see rate markets deviating too much right now until the aforementioned data lands.

Written by Aaron Hill, FP Markets Market Analyst