Rise In October Consumer Inflation Not Enough To Stop Fed Rate Cuts

Consumer inflation accelerated in October 2024. However, the odds of a Federal Reserve interest rate cut on December 18 are still high. October year-on-year total Consumer Price Index inflation accelerated to 2.6% from 2.4%, while total Personal Consumption Expenditures inflation accelerated to 2.3% from 2.1%, and core PCE inflation accelerated to 2.8% from 2.7%. Core CPI was unchanged in October, but it was sticky and more elevated at 3.3%. Despite elevated consumer inflation rates, the chance of a 0.25% Fed rate cut on December 18 was 66% on November 30.

October CPI Consumer Inflation Rates Are Elevated

The U.S. Bureau of Labor Statistics release of the October CPI showed an acceleration in year-on-year total CPI to 2.6% from 2.4%. Although CPI consumer inflation rates have fallen, they are still not at the Fed’s 2% target, and year-on-year total CPI is unlikely to get back down to 2% until sometime in the first half of 2025. Meanwhile, year-on-year core CPI was unchanged and elevated at 3.3% in October.

CPI inflation rates are significantly lower than a year ago, but they remain above the Fed’s 2% long-term target.

October PCE Consumer Inflation Rates Accelerated

Following the release of the October CPI report, the U.S. Bureau of Economic Analysis released the October PCE report, which showed an acceleration in year-on-year total PCE inflation to 2.3% from 2.1% and an acceleration in year-on-year core PCE inflation to 2.8% from 2.7%.

Like year-on-year CPI inflation rates, PCE inflation rates are significantly lower than a year ago. However, these inflation rates are still above the Fed’s 2% target, and accelerations in October year-on-year consumer inflation rates could hinder or slow the pace of future potential Fed interest rate cuts.

Fed Policy Expectations Despite Elevated Consumer Inflation

The next Federal Reserve policy decision will be released on December 18, and Prestige Economics is forecasting a 0.25% interest rate cut.

With elevated year-on-year CPI and PCE inflation rates, growth data releases ahead of the December Fed decision will provide critical insights into the health of the U.S. economy that inform Fed policy actions.

Market participants and policymakers will be looking for forthcoming data to either justify or invalidate interest rate cut expectations and concerns.

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As of November 30 at 1:00 p.m. ET, the CME FedWatch tool reflected the odds of a 0.25% rate cut at 66%, while the odds of no change in interest rate policies were 34%.

Lower Interest Rates Would Support Growth And Markets

Equity markets surged in the wake of the U.S. presidential election due to a swift and decisive outcome that greatly reduced the risks of uncertainty and political violence. With the prospect of easing interest rates, there are upside risks to economic growth, business activity, and business valuations.

Elevated consumer inflation rates seem unlikely to end the Fed’s cycle of interest rate cuts, even though it is possible that future rate cuts may be implemented more slowly than market participants are currently expecting.

Clearly, financial markets are expecting an interest rate cut. However, even if the Fed cuts interest rates on December 18, a great deal of attention will be paid to the Federal Open Market Committee’s projections for future growth, inflation, unemployment rates, and interest rates.

How do you expect elevated consumer inflation rates will impact Fed policy on December 18?

Let me know in the comments below.

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