US inflation hits lowest point since february 2021; consumer prices slightly exceed September expectations

Inflation in the US has dropped to its lowest level since February 2021, despite consumer prices rising slightly above expectations in September. This trend could encourage the Federal Reserve to cut interest rates again next month.

The Labor Department's Bureau of Labor Statistics reported on Thursday that the Consumer Price Index (CPI) increased by 0.2% in September, matching the rise in August. Over the past 12 months, the CPI climbed by 2.4%, marking the smallest year-on-year increase since February 2021. This follows a 2.5% annual rise in August.

Economists polled by Reuters had forecast the CPI would edge up by 0.1% monthly and 2.3% annually. The inflation rate has significantly slowed from its peak of 9.1% in June 2022.

This moderation in inflation, along with other measures tracked by the Federal Reserve, has enabled the central bank to shift its focus to the labor market. This pivot led to an unusually large 50 basis points rate cut in September.

Minutes from the Fed's September meeting, published on Wednesday, revealed that a "substantial majority" of policymakers supported initiating a phase of easier monetary policy. However, there was broad agreement that this initial move would not dictate the pace of future rate cuts.

This recent rate reduction, the first since 2020, brought the central bank's policy rate down to the 4.75%-5.00% range. The Fed had previously raised rates by 525 basis points over 2022 and 2023.

Despite the Fed's easing stance, the resilience of the labor market and robust consumer spending have tempered investors' expectations of another half-percentage point rate cut next month.

In September, the economy added the most jobs in six months, and the unemployment rate dropped to 4.1% from 4.2% in August. Revised national accounts data from 2019 through the second quarter of this year also indicated that the economy was in better shape than previously estimated.

However, there are still areas of persistent inflation, particularly in rents, which are slowing the overall cooling of underlying inflation.

Excluding the volatile food and energy sectors, the core CPI rose by 0.3% in September, mirroring August's increase. Over the past 12 months, the core CPI increased by 3.3%, following a 3.2% rise in August.

As of early Thursday, financial markets were predicting a roughly 76% chance of a 25 basis points rate cut at the Fed's November 6-7 policy meeting, according to CME Group's FedWatch Tool. The probability of rates remaining unchanged was about 24%.