Consumer prices rose in September
Alexander Ovchinnikov
Oct 10, 2024The consumer price index report and labor market data clearly did not bring the results the Fed would have liked to see after the sharp rate cut in September by two steps.
The unexpected decision by the central bank broke the matrix of expectations of Fed actions that had been forming for decades and forced investors to frantically seek confirmation of labor market weakness. The narrative of Fed Chairman Jerome Powell, let us recall, was this: the Fed must now pay maximum attention to employment, as inflation has been defeated and nothing more needs to be done with it.
But the markets have not yet found arguments in favor of this version of events. Moreover, the labor market report suddenly showed strong growth in the number of new jobs in September and the fact that the growth of nominal wages has accelerated again. We wrote about this report here.
Today was published one of the key reports, the release of which precedes the Fed meeting on November 7. Here are the most important data, according to the Bureau of Labor Statistics report:
- consumer prices rose in September by 0.18% m/m compared to expectations of a 0.10% increase and 0.19% m/m in August
- investors also expected inflation to slow to 2.3% year-on-year, but the report showed 2.44% y/y against 2.53% y/y a month earlier
- the core index is also not doing well: its growth rate accelerated to 0.31 m/m compared to the expected slowdown to 0.2% and 0.28% in August
- year-on-year growth rates accelerated to 3.31% against 3.20% y/y a month earlier
- in the services sector, prices rose by 0.36% m/m, or 4.76% year-on-year compared to 4.93% y/y — the rates remain high.
In general, this is clearly not a success story and — along with the dynamics in the labor market — definitely not the situation the Fed would like to see.
Why it matters
At the end of the month, the first estimate of GDP for the third quarter will be given, and a report on the consumer spending deflator — a key inflation indicator for the Fed — will be released. In addition, on November 1, a labor market report will be released. If the data remains strong, then at the meeting on November 7, the Committee members will definitely have to return to the question of which of the Fed's mandates currently has priority.
The probability of a 25 basis point rate cut in November is estimated by the market at about 88%. The yield on two-year Treasury bonds has decreased today to 3.98% because of this. But there is no certainty about where the yield on 10-year bonds might end up. It is quite likely that before the publication of GDP data, the deflator, and labor market data, it will settle above 4.0% and possibly even reach 4.2%.
