US inflation rose to 2.6 per cent in October, as the Federal Reserve debates whether to cut interest rates at its last meeting before US president-elect Donald Trump takes office.
Wednesday’s figure from the Bureau of Labor Statistics was in line with economists’ expectations of a 2.6 per cent rate of growth and above September’s 2.4 per cent.
Once volatile food and energy prices were stripped out, “core” CPI held steady at 3.3 per cent on an annual basis. However, monthly core prices rose 0.3 per cent for a third month in a row, indicating that underlying inflation had yet to be fully tamed.
Alberto Musalem, president of the St Louis Fed, warned in a speech on Wednesday that the risk that inflation stalled out above 2 per cent or moved higher had risen, while the risk that the labour market deteriorates quickly had “possibly fallen”.
He reiterated his call for “gradual” reductions in interest rates.
Sarah House, senior economist at Wells Fargo, said Wednesday’s figures showed that “it’s difficult to wring out this last bit of inflation”, pointing to the “long tail” of the impact of the Covid-19 pandemic and the persistence of price pressures in services.
The inflation data will be closely watched by the US central bank, which has already lowered its benchmark rate by 0.75 percentage points over two successive meetings to a new target range of 4.5-4.75 per cent.
Fed officials are trying to reach a “neutral” rate setting that keeps inflation in check without squashing demand, in a bid to pull off a so-called soft landing that would avoid a recession.
In the wake of Trump’s election, markets have been worried about a resurgence of inflation, driving up Treasury yields. They fell back slightly following Wednesday’s data release, as investors bet that the Fed was now more likely to cut interest rates next month.
Futures markets imply a roughly 80 per cent probability of a quarter-point cut in December, up from 60 per cent before the inflation figures.
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Two-year Treasury yields, which track interest rate expectations, fell 0.07 percentage points to 4.27 per cent.
“I think we’re seeing some relief that [the inflation data] wasn’t an upside surprise and relief that it was just in line with expectations,” said House.
US stocks rose slightly, with the S&P 500 up 0.3 per cent in afternoon trading.
Most metrics suggest the US economy is in good health, with recent retail sales figures suggesting consumers are still spending. The labour market is also robust despite last month’s poor jobs report, which was dragged down by hurricanes and a strike at Boeing.
Inflation has fallen significantly from its peak of more than 9 per cent in 2022, but progress has slowed in recent months.
On a monthly basis, prices rose 0.3 per cent — in line with the past three reports. Half of that increase stemmed from a 0.4 per cent increase in the index tracking housing-related costs, the BLS said on Wednesday.
Energy prices were flat for the month, following a 1.9 per cent decline in September. Further increases in airline fares were offset by declines in prices for clothes and furniture.
At a press conference last week, following the Fed’s latest quarter-point rate cut, chair Jay Powell said he expected inflation to “come down on a bumpy path over the next couple of years” before settling near the central bank’s 2 per cent target.
Neel Kashkari, Minneapolis Fed president, told Bloomberg on Wednesday that he was confident “inflation is headed [in] the right direction”.
But the path could become more volatile following Trump’s victory. The president-elect has pledged to enact sweeping tariffs, deport immigrants en masse and lower taxes. Economists warn that these policies could stoke price pressures while breeding uncertainty that could hamper growth.
Mark McCormick, head of forex and emerging markets strategy at TD Securities, said a second Trump presidency, combined with relatively strong recent economic data, made one “cautious to think that inflation can get back to 2 per cent at a comfortable rate any time soon”.
Powell last week said the Fed did not “speculate” about the timing or substance of any future policy changes. As such, he said, “in the near term, the election will have no effects on our policy decisions”.
