U.S. inflation, as measured by the Consumer Price Index (CPI), showed mixed results in its most recent September reading. Both core inflation (which excludes volatile food and energy prices) as well as non-core CPI came in higher than estimated, which likely increases the probability of a quarter-point cut at the next Federal Reserve meeting in November.

Overall, while both core and non-core CPI have cooled significantly from their historic highs in 2022, the path back to the Fed’s target rate of 2% has been somewhat bumpy and uncertain. While overall CPI grew 2.4% YoY in September, which is down from 2.5% in August, this was still higher than economists’ expectations of 2.3%. Additionally, core CPI reversed course and rose over the month, climbing to 3.3% YoY versus 3.2% in August.

Some of the main causes of the surprisingly high core level include things like apparel, which rose 1.1%, car insurance, which rose 1.2%, and airfare, which rose 2.9%, all having increased materially month over month according to the U.S. Bureau of Labor Statistics. Non-core inflation was impacted largely by food prices, which posted their biggest monthly price increase since January, offset to some degree by energy, with gasoline falling 4.1% over the month.

While the path back down to 2% inflation was never going to be perfectly linear, this most recent bump comes at a particularly interesting time in our view. September’s reading, the last before the presidential election in November, follows a relatively aggressive 50 bp cut from the Federal Reserve signaling to the markets that the Fed believed the prolonged period of higher rates had done enough to cool prices without causing profound damage to the economy.

Looking forward, attention is turning to the Fed’s November meeting, at which time the market is currently pricing in a ~90% chance of a 25 bp rate cut. CPI is just one of many data points that the Federal Reserve uses to guide monetary policy. The Fed’s preferred metric to gauge inflation, the Personal Consumption Expenditures Price Index (PCE), won’t be available until October 31.

Overall, while the most recent CPI was higher than expected, it was likely not enough to change the underlying narrative that inflation is still heading in the right direction. We expect the Fed will maintain the course.