The October Consumer Price Index report showed that the inflation rate rose slightly in October—a clear sign that while price pressures have eased significantly since 2022, the last mile may prove bumpy.
The Bureau of Labor Statistics reported Nov. 13 that the CPI rose 2.6% in October from year-ago levels (an increase from September’s 2.4% rate) and 0.2% from month-ago levels. Core inflation, which excludes volatile food and energy prices, increased 3.3% over the last 12 months after rising 3.3% in September.
“Inflation came in a bit higher than we expected in October, although not to the extent of last month’s reading,” says Morningstar chief US economist Preston Caldwell. Rising shelter, food, and used car prices put upward pressure on the index.
Despite the uptick, analysts generally do not expect the Federal Reserve to alter its trajectory, at least for now. The central bank has reduced its benchmark interest rate by 0.75% since September, and it’s generally expected to deliver another quarter-point cut at its final policy meeting of 2024.
“After today’s data, we still think it’s most likely the Fed cuts in the upcoming December meeting, but there’s still an outside possibility of a skip,” Caldwell explains.
US CPI vs. Core CPI
Source: Bureau of Labor Statistics.
October US CPI Report Key Stats
• CPI rose 0.2% for the month, as it did in September.
• Core CPI climbed 0.3% after rising by the same amount in September.
• CPI climbed 2.6% year over year after rising by 2.4% the prior month.
• Core CPI increased 3.3% from year-ago levels after increasing 3.3% in September.
Change in Selected CPI Components
Source: Bureau of Labor Statistics.
Food prices rose 0.2% in October after growing 0.4% in September. Grocery prices rose 0.1%, while restaurant prices rose 0.2%. Gas prices continued to fall.
Shelter prices rose 0.4% after rising 0.2% in September. Housing prices have been one of the biggest drivers of inflation over the past year, but Caldwell expects to see some moderation soon. “Housing inflation has remained high for longer than expected, but it’s still due for a correction based on the latest market data,” he says.
Fed’s Preferred Inflation Measure Now Approaching 2% Target
Caldwell predicts the Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, will come close to its target later this month. The PCE Index uses much of the same source data as the CPI, but that data is weighted differently. Housing and used auto prices were major contributors to an elevated CPI reading in October, but Caldwell expects they will have less impact on the PCE index.
“Housing has only around one-half the weighting in the PCE as it does in the CPI, so that’s one factor that means the PCE will likely run lower than the CPI this month,” he says.
Caldwell adds that after today’s data, he expects core PCE to come in around 0.2% month over month. “That’s only slightly higher than the 0.17% consistent with a 2% annual rate of inflation,” he says.
Month-over-Month Changes to Headline CPI vs. CPI
Source: Bureau of Labor Statistics.
Will the Fed Cut Rates in December?
Over the past several weeks, firmer inflation data and expectations of strong economic growth have led investors to recalibrate their expectations for the path of monetary policy.
Caldwell says he still expects the Fed to proceed with a 0.25% interest rate cut in December, bringing the target federal-funds rate down to a range of 4.25%-4.50%. He sees a 20% chance the Fed will skip a cut and hold rates steady, in line with expectations in the bond market.
Federal-Funds Rate Target Expectations for Dec. 18, 2024 Meeting
Source: CME FedWatch Tool.
“Some combination of firmer data on inflation, the labor market, or economic activity could drive the Fed to skip in December,” Caldwell says. “If core PCE projects to come in closer to 0.3% month over month in November while the labor market continues to look healthy, that would exert a strong influence on the Fed to skip.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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