The Bureau of Labor Statistics (BLS) reported on Wednesday that U.S. inflation edged higher in October, aligning with Wall Street expectations. The consumer price index (CPI), a key measure tracking the cost of goods and services, rose 0.2% for the month. This brought the annual inflation rate up to 2.6%, a 0.2 percentage point increase from September, in line with Dow Jones forecasts.
Core Inflation Sees a Slight Uptick
Excluding volatile food and energy prices, core CPI showed a more notable rise of 0.3% month-over-month and 3.3% year-over-year, also meeting analyst expectations. Following the release, stock market futures inched higher, while Treasury yields dipped, signaling cautious optimism among investors.
Energy and Shelter Prices: A Mixed Picture
Energy prices remained flat in October after months of declines, while the food index climbed 0.2%. Annually, energy costs were down 4.9%, but food prices maintained a 2.1% increase. Shelter costs, which carry significant weight in the CPI calculation, were a major contributor to inflation, rising 0.4% in October—twice the pace of September—and up 4.9% year-over-year. This single category accounted for more than half of the monthly CPI gain, underscoring its outsized influence on overall inflation.
Other notable changes included a 2.7% rise in used vehicle prices, a 3.2% surge in airline fares, and a sharp 6.4% drop in egg prices, which remain 30.4% higher than a year ago. Meanwhile, motor vehicle insurance dipped 0.1% but still showed a 14% annual increase.
Wages and Household Implications
Despite rising inflation, inflation-adjusted average hourly earnings for workers saw a modest 0.1% increase in October and a 1.4% rise over the past year, according to a separate BLS report. This reflects a challenging environment for U.S. households, as inflation continues to weigh on consumer budgets despite easing from its peak levels in mid-2022.
Fed’s Monetary Path Forward
October’s inflation figures could complicate the Federal Reserve’s strategy as it considers further rate cuts amid a changing political landscape. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, noted, “No surprises from the CPI, so for now the Fed should be on course to cut rates again in December. Next year is a different story, though, given the uncertainty surrounding potential tariffs and other Trump administration policies.”
The central bank has already reduced its benchmark borrowing rate by 0.75 percentage points this year, with more cuts previously anticipated. However, traders now foresee fewer rate reductions through 2025, with only an additional three-quarters of a point in cuts expected—half a point less than prior to the presidential election.
The Trump Administration’s Potential Impact
President-elect Donald Trump’s economic agenda could influence inflation trends significantly. His proposed policies, including new tariffs and increased government spending, may stimulate growth but also exacerbate inflationary pressures. The potential for higher tariffs, in particular, has sparked concerns about the costs being passed down to consumers, making price stability more elusive.
Richard de Chazal, a macro analyst at William Blair, emphasized, “Many of these policies are more inflationary than deflationary, at least in the very near term. The risk is that consumers’ ability to handle another round of inflation may be more fragile than before.”
Market Reaction and Expectations
In light of these developments, market sentiment has shifted. Traders have scaled back their rate-cut expectations for 2025, anticipating that the Fed might pause its rate reductions as early as January. Treasury yields initially dipped following the CPI report but reversed as markets reassessed the potential impact of Trump’s economic policies.
While the October CPI report brought no significant surprises, it highlighted persistent areas of inflation that could challenge the Fed’s monetary policy and complicate economic strategy under the new administration. As the market braces for potential policy shifts, attention will remain on the balance between growth and inflation in the months ahead.
