October 12, 2023 • By Dan Burrows
Headline inflation rose by more than economists were expecting last month, the September Consumer Price Index (CPI) showed Thursday, supporting the view that higher for longer interest rates will be necessary to bring inflation down to the Federal Reserve’s long-term target.
Consumer prices rose 0.4% in September – down from a 0.6% increase in August – the Bureau of Labor Statistics reported Thursday. Economists were looking for headline inflation to increase 0.3% last month. So-called core CPI, which excludes volatile food and energy prices and is considered to be a better indicator of future inflation, rose 0.3% last month, which was in line with forecasts.
Although the latest inflation data shouldn’t deter the central bank from leaving interest rates unchanged at the next Fed meeting, it does open the door to another rate hike before the end of the year, experts say.
Interest rate traders currently assign an 89% probability to the Federal Open Market Committee leaving rates unchanged at a target range of 5.25% to 5.5% when it concludes its policy meeting on November 1, according to CME Group’s FedWatch Tool. That’s up from 80% a week ago. As for the Fed’s December meeting, traders put the odds of a quarter-point hike at 35%, up from 26% a week ago.
With the September CPI report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
Expert takes on the CPI report
“September’s CPI demonstrates that progress in lowering inflation ahead is likely to prove slower-going than it has been over the past year. However, the downward trend remains in place in our view, with the core CPI set to recede further over the coming year as shelter disinflation resumes, supply-related pressures ease and consumers grow more price sensitive. While there remains further ground to cover in returning inflation to 2% on a sustained basis, we believe recent realized progress will be enough to keep the FOMC on hold at its upcoming November meeting.” – Sarah House, senior economist at Wells Fargo Economics
“While somewhat above our expectations, we do not expect today’s CPI report to affect the outcome of the November FOMC meeting, for which we expect unchanged policy. Recent commentary by Fed officials has also sent a strong signal that the FOMC is likely to keep the funds rate unchanged in November.” – Jan Hatzius, chief economist at Goldman Sachs
“Higher than expected headline inflation will continue to keep the Federal Reserve (Fed) in a defensive position even as core CPI continued to disinflate on a year-over-year basis. However, the acceleration in shelter costs in September is slowing down the disinflationary process and supports the Fed’s ‘higher for longer’ message.” – Eugenio Alemán, chief economist at Raymond James
“Headline CPI report this morning came in slightly ahead of estimated, mainly due to rising energy costs with also a small increase in food prices, as well. Stripping out food and energy, Core CPI came in line with estimates at 4.1% year-over-year. Market reaction is muted given the upside surprise in headline being attributed to energy prices – very little reaction from the bond market with 10 year yields up just 5 basis points. Dollar gains are connected to relative interest plays of the major central banks and, all in all, paint a picture for investors that inflation continues to be stubborn but does not appear to be reaccelerating.” – Stephen Kolano, managing director of investments at Integrated Partners
“Despite the slight acceleration in overall consumer price inflation in September, the details of the report aren’t enough to prompt the Fed to hike again. The most likely course of action for the Fed is no further tightening, but for rates to remain higher-for-longer to ensure that inflation approaches its 2.0% target.” – Jay Hawkins, senior economist at BMO Capital Markets