The rapid decline in U.S. inflation seems to have hit a pause, raising doubts about the Federal Reserve’s strategy to reduce interest rates in early 2025. According to economists surveyed by The Wall Street Journal, October’s Consumer Price Index (CPI) is anticipated to rise by 0.2%. However, some top Wall Street forecasters are expecting a 0.3% increase, which would mark the largest monthly jump in six months.
This anticipated rise would result in the annual inflation rate ticking up to 2.6% from 2.4%, breaking an eight-month streak of declines. While a single increase doesn’t necessarily signal a persistent rise, it does highlight ongoing inflationary pressures in certain key areas. Specifically, costs in housing, rent, auto insurance, and car repairs remain sticky, which may prolong the road to achieving the Fed’s 2% inflation target.
Persistent Core Inflation Complicates Fed’s Path
Core CPI, which excludes volatile items like gas and energy, offers a clearer view of underlying inflation trends and is forecasted to climb by 0.3% for the second consecutive month. The annual core inflation rate is expected to remain steady at 3.3%, well above the Fed’s target level, and has shown minimal change since mid-2023.
Fed Chairman Jerome Powell has already indicated a “bumpy” path to reaching stable inflation at 2%, emphasizing that while progress is underway, victory over inflation isn’t yet assured. Powell’s remarks echo sentiments that inflation will continue to fall gradually, but irregularly, over the next several years.
Rate Cuts in 2024, but a Pause Expected in 2025
While another rate cut is expected at the Fed’s December meeting, lingering inflation and a robust U.S. economy have injected uncertainty about the pace of cuts in 2025. January could mark a temporary halt in rate reductions due to sustained inflationary pressures arising from solid economic growth, which often correlates with higher inflation.
This change in outlook has prompted many investors and analysts to adjust their expectations. Previously, the Fed was forecasted to make four rate cuts in 2025, but recent sentiment suggests that three rate cuts are now more likely, as economists and financial institutions like TD Securities predict a December cut followed by a pause.
CPI vs. PCE: The Fed’s Preferred Measure of Inflation
Although the Fed does not base its decisions directly on the CPI, this index provides insights into the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, which is released at the end of each month. The CPI data often precedes changes in the PCE index, and October’s CPI increase could foreshadow a higher PCE figure, adding further complexity to the Fed’s policy decisions.
The Fed faces mounting challenges in reaching its 2% inflation target, especially as core inflation remains resilient. While rate cuts are likely in December, the Fed may adopt a more cautious approach in early 2025, opting to pause cuts to allow inflation to cool further. Investors and market participants should prepare for a slower, more uncertain path to interest rate normalization, with inflationary pressures persisting in critical sectors.
