Inflation Data in Focus: Fed's Interest Rate Debate Under Scrutiny

The upcoming Consumer Price Index (CPI) update for September is marked by the ongoing debate within the Federal Reserve about future interest rate policy. The report, expected on Thursday at 8:30 AM ET, is likely to show an inflation rate of 2.3% compared to 2.5% in August, the lowest level since early 2021. On a monthly basis, a price increase of 0.1% is projected, down from the 0.2% rise in August. Core inflation, which excludes volatile food and energy costs, is expected to remain at 3.2% year-over-year, as it was in August. A slight monthly decline to 0.2% from the 0.3% increase in the previous month is anticipated, according to Bloomberg data. Despite the slowdown, inflation remains above the Federal Reserve's 2% target. Meanwhile, the Federal Reserve's attention is increasingly focused on the surprisingly robust labor market. Recent data from the Bureau of Labor Statistics show that 254,000 new jobs were created in September, well above the expected 150,000, while the unemployment rate fell from 4.2% to 4.1%. This positive development affects expectations for interest rate policy. Markets are now anticipating a smaller rate cut of 25 basis points in November, compared to a previously expected larger move. However, experts emphasize potential risks of rising inflation. Ohsung Kwon, equity strategist at Bank of America, points out that overheating inflation could lead to market volatility. Moreover, conservative forecasts for rent inflation and rising costs in other areas such as used cars and airfares could cause core inflation to rise more sharply in September. However, Bank of America's economic experts remain confident that a stable labor market and anchored inflation expectations will support the easing trend. Nonetheless, external risks such as port strikes on the East Coast, rising oil prices, and higher shipping costs are being considered, which could delay the disinflation process.