US Inflation Cools to 3% in September,Fueling Rate Cut Expectations
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The latest inflation data released Friday indicates US inflation rose less than anticipated in September, reaching 3%, and is bolstering expectations that the Federal Reserve will continue its easing of monetary policy at its upcoming meeting. This development offers a potential reprieve for markets and consumers alike.
Inflation Data Undershoots Expectations
The annual consumer price index (CPI) figure, reported by the Bureau of Labor Statistics, registered a 3% increase, up from August’s 2.9% but falling short of the 3.1% forecast among economists surveyed by Bloomberg. The two-year Treasury yield, which typically moves inversely with prices, initially declined but recovered to close 0.01 percentage point lower at 3.48% during afternoon trading. The dollar also pared back early losses,ending the day relatively flat against a basket of currencies.
Positive market reaction was also evident in the stock market, with the S&P 500 climbing 1% and poised to close at a record high.
Fed Policy and Political Pressure
The Federal Reserve is scheduled to convene next on Tuesday and Wednesday, where a quarter-point reduction in interest rates is widely anticipated. The central bank previously lowered rates by the same margin at its september meeting, bringing the target range to 4-4.25%, and signaled the possibility of further adjustments.
The Fed’s decision-making process has been marked by internal debate this year, balancing concerns about a slowing labor market with the potential for rising inflation driven by the governance’s tariff policies. The Fed chair has faced considerable pressure from the US president to lower borrowing costs since January.
A White House spokesperson attributed the lower-than-expected inflation figures to “President Trump’s economic agenda” and criticized the shutdown, blaming it on Democratic opposition. The spokesperson warned that the lack of an October inflation report could “leave businesses, markets, families and the Federal Reserve in disarray.”
Market Volatility and Economic Outlook
One analyst at Citi noted that markets are anticipating the eventual release of the October report, albeit with a likely delay. “That creates an issue in markets and for policymakers as you don’t know the state of the economy [initially] and then all at once we might get a bunch of data that updates us on the state of the economy,” the analyst explained. “so you end up with a period of heightened volatility.”
Annual core inflation, excluding volatile food and energy prices, rose to 3%, also below expectations of 3.1%. Energy prices increased by 2.8% over the period, while food prices climbed 3.1%, with gasoline prices leading the increase at 4.1% compared to the previous month.
Tariffs and Inflation: A Complex Relationship
A chief US economist at Jefferies suggested Friday’s figures “where inconsistent with the expectation that tariffs would raise the price of goods,” adding, “There is little pass-through to consumers from tariffs.” however, a senior economist at Schroders cautioned against complacency, emphasizing the risk that tariffs could still contribute to price increases in the coming months. “An inflation resurgence is at risk of being under-appreciated by the Fed and underpriced by the market,” the economist stated.
Separately, the university of Michigan’s October reading on consumer sentiment was revised lower Friday. Year-ahead inflation expectations remained at 4.6%, but long-term expectations rose to 3.9%.
