Following last week's far stronger than expected September non-farm employment data, the U.S. September inflation and core inflation also exceeded expectations across the board, showing that the Federal Reserve's task of combating inflation in the "last mile" remains challenging.

On the evening of October 10th (Thursday) Beijing time, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose by 2.4% year-on-year in September, the lowest since March 2021, slowing down from the previous value of 2.5%, but higher than the expected 2.3%; it rose by 0.2% month-on-month, equal to the previous value, and also higher than the expected 0.1%; the U.S. core CPI rose by 3.3% year-on-year in September, the largest year-on-year increase in a year and a half, higher than the expected and previous value of 3.2%; the U.S. core CPI rose by 0.3% month-on-month in September, higher than the expected 0.2%, equal to the previous value.

The initial jobless claims data released at the same time showed that as of the week ending October 5th, the number of Americans filing initial jobless claims unexpectedly rose to 258,000, the highest since the week ending August 5th, 2023, an increase of 33,000 people month-on-month, and far higher than the expected 230,000.

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After the release of the above two sets of data, traders' bets on a 25 basis point rate cut by the Federal Reserve in November rose by 6 percentage points. Fitch Ratings' Head of U.S. Economic Research, Olu Sonola, said in a comment email sent to reporters from Daily Economic News, "Following the unexpected growth in non-farm employment data in September, this inflation report will make the Federal Reserve more cautious about the pace of easing. (We believe that the subsequent) possible policy path is still a 25 basis point rate cut in November, but the market should not take a rate cut in December for granted."

CPI data exceeded expectations, inflation remains stubborn

The U.S. Bureau of Labor Statistics said that the main reason for the rise in inflation in September was due to the increase in food prices and housing costs, with food prices and housing costs rising by 0.4% and 0.2% respectively that month, offsetting the impact of a 1.9% drop in energy prices. Other items that saw price increases in September include a 0.3% rise in used car prices, a 0.2% rise in new car prices, a 0.7% rise in healthcare services prices, and a 1.1% rise in apparel prices.

The U.S. CPI rose by 2.4% year-on-year in September, the lowest since March 2021. Source of image: CNBC

Looking at the highest month-on-month increase in food prices, U.S. inflation remains stubborn. In September, U.S. egg prices rose by 8.4%, with an unadjusted 12-month increase of 39.6%; butter prices rose by 2.8% month-on-month and 7.8% year-on-year. At the same time, September transportation services prices rose by 8.5% year-on-year, and healthcare services prices rose by 3.6%, which are the main reasons for the high core CPI.

Housing prices, which have been higher than expected by Federal Reserve officials this year, rose by 4.9% year-on-year in September, down from the 5.2% year-on-year increase in August. This decrease may indicate that broader price pressures in the future have eased.Fitch Ratings' Head of US Economic Research, Olu Sonola, stated, "The downward trend in CPI persists, but service sector inflation remains a concern. Although inflation is cooling, it is not yet fully cooled. Following the better-than-expected growth in September's non-farm payroll data, this inflation report will make the Federal Reserve more cautious about the pace of easing."

The bet on a 25 basis point rate cut in November rose slightly by 6 percentage points.

The Federal Open Market Committee (FOMC) of the Federal Reserve is clearly facing more challenges than just the higher-than-expected rebound in September's inflation.

The latest meeting minutes released early today (October 10th) Beijing time also show significant internal disagreement within the FOMC over the decision to cut rates by 50 basis points in September.

Although the final FOMC policy statement showed that only Governor Bowman voted against the 50 basis point rate cut, during the discussion, "some" policymakers favored a 25 basis point rate cut. "A few participants noted that a 25 basis point rate cut would be consistent with a gradual path of policy normalization, allowing policymakers time to assess the degree of policy constraints in the process of economic development."

The minutes read: "A substantial majority of participants" supported a substantial rate cut of 50 basis points. Participants in favor of a 50 basis point rate cut believed that a "recalibration" of the monetary policy stance would allow it to better align with recent inflation and labor market indicators. Some participants also indicated that data after July provided support for a more accommodative policy. They emphasized that this move would help maintain strong momentum in the economy and labor market, while continuing to promote progress in reducing inflation and reflecting a balanced risk assessment of employment and inflation.

In addition, participants also had significant disagreements on economic and policy positions. Analysis suggests that this poses a challenge for Federal Reserve Chairman Powell's subsequent communication with members.

However, Federal Reserve policymakers' concerns about the labor market have been rising, and they have noted the recent increase in unemployment rates, as well as weak employment and inflation data for July and August. Participants indicated that as long as inflation continues to decline, rate cuts may continue, with the pace and endpoint of rate cuts still subject to discussion.

Overall, the higher-than-expected inflation data for September, combined with the strong performance of last week's US non-farm employment report, may intensify discussions about whether the Federal Reserve will choose a small rate cut or a pause in rate cuts next month. The September dot plot indicates that the Federal Reserve plans to cut rates by another 50 basis points before the end of the year, with many voters stating that they are monitoring the dynamics of the labor market.After the release of the CPI data, futures traders slightly increased their bets on the Federal Reserve's FOMC cutting interest rates by 25 basis points in November. According to the CME Group's "FedWatch" tool, as of the time of writing, traders believe there is an 86.3% probability of the FOMC cutting rates by 25 basis points next month, up from around 80% before the data was released.

At the same time, traders maintained their expectations for two more 25 basis point rate cuts within the year.

Traders have slightly increased their bets on a 25 basis point rate cut by the Federal Reserve in November, but they have not fully digested this expectation. Overall, the CPI data sends mixed signals, and traders are trying to find a balance between concerns about the job market and the stickiness of inflation, attempting to determine whether the Federal Reserve will prioritize full employment or price stability.