U.S. inflation rose 2.6% on an annual basis last month, representing an uptick from September when the Federal Reserve began cutting interest rates amid signs of cooling prices and a weaker labor market.
That matched forecasts from economists polled by FactSet that the Consumer Price Index rose 2.6% in October. The CPI rose 2.4% in September, when the Fed ushered in a jumbo rate cut of 0.5 percentage points, followed by a second rate cut this month.
The slight rise on a month-over-month basis signals that the Fed’s battle to tame inflation to its goal of a 2% annual rate might take a bumpy path over the next months. Some types of goods and services, from housing to insurance products, are still experiencing sharply higher prices, crimping consumers’ budgets and creating economic headwinds.
“Looking ahead to the next six months, we foresee consumers and businesses still spending but doing so more prudently amid still-elevated costs and rates,” noted EY chief economist Gregory Daco in a November 11 research note.
A key driver of last month’s inflation bump was the housing market, with shelter prices rising 0.4% in October, contributing about half of the monthly increase, the Bureau of Labor Statistics said on Wednesday. Transportation costs also rose due to higher airfares and a 14% annual jump in auto insurance, the report said.
Despite the monthly uptick in prices, the Federal Reserve is forecast to cut rates for a third time this year at its December meeting, with two-thirds of economists polled by FactSet predicting a 0.25 percentage point cut. The latest CPI report isn’t likely to derail that, given that the inflation numbers were in line with expectations, noted Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management in an email.
“Bang in-line core inflation leaves the Fed on track to cut rates in December,” Rosner wrote. “After a run of unseasonably hot autumn data, today’s number cools fears of an imminent slowdown in the pace of rate cuts.”
Trump’s policies and inflation
The inflation report marks the first since the November 5 election, which handed former President Donald Trump another win. But the president-elect’s economic policies, which include a broad-based tariff on all imports and deporting millions of undocumented immigrants, could prove inflationary, economists say.
Trump’s plans could boost the inflation rate by as much 1 percentage point, bringing it to an annual rate of about 3.6% — above the Fed’s 2% goal — some Wall Street experts have forecast.
If that occurs, the Fed would likely slow its pace of rate cuts in order to battle ongoing elevated inflation, experts note.
“Still, with uncertainty over fiscal and trade policies high there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in,” Rosner added.