US Inflation Hits Lowest Level Since February 2021: September Consumer Prices Edge Above Forecasts

A Subtle Rise in Consumer Prices Amid Low Inflation

In September, the U.S. consumer price index (CPI) increased slightly more than expected, marking a modest 0.2% rise following an identical increase in August. Despite this, the annual inflation rate reached its lowest point in over 3.5 years, a sign that inflationary pressures have significantly eased since peaking in mid-2022. This could potentially keep the Federal Reserve on course for another interest rate cut next month.

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According to data released by the Labor Department’s Bureau of Labor Statistics, the CPI increased by 2.4% year-on-year in September, a slight reduction from the 2.5% rise seen in August. This marks the smallest annual increase since February 2021, showing a notable slowdown from the 9.1% peak inflation recorded in June 2022.

Core Inflation Remains Sticky as Rent Prices Slow Down

While inflation overall is decelerating, certain components, particularly housing and rents, are still showing signs of stubbornness. Excluding volatile items such as food and energy, core inflation rose by 0.3% for the second consecutive month, and by 3.3% over the past 12 months, a slight uptick from August’s 3.2%.

Federal Reserve's Next Move: Rate Cuts on the Horizon?

The recent moderation in inflation has allowed the Federal Reserve to shift its focus toward stabilizing the labor market. In September, the Fed implemented a 50-basis-point rate cut, its first since 2020, lowering the policy rate to the 4.75%-5.00% range. This follows a series of aggressive rate hikes over 2022 and 2023, where the Fed raised rates by a total of 525 basis points in an effort to combat rising inflation.

Labor Market Resilience Could Limit Further Rate Cuts

Despite easing inflation, the strength of the labor market may present a challenge for further rate reductions. The U.S. economy added the highest number of jobs in six months during September, and the unemployment rate dropped to 4.1%, down from 4.2% in August. This robust job growth, combined with solid consumer spending, could temper the Fed’s appetite for additional cuts.

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Outlook: Cooling Inflation, but Caution Remains

The recent trends in inflation and monetary policy signal that the U.S. economy is on a path to stability, but uncertainties persist. While inflation has receded significantly from its highs, pockets of stickiness in sectors such as housing, coupled with labor market strength, mean the Federal Reserve will need to tread carefully in the coming months.

As financial markets continue to monitor the Fed’s actions, the probability of a rate cut in November remains high, but future reductions will likely depend on further economic data. With inflation close to the Fed’s 2% target, the central bank's focus has now shifted to ensuring that any policy changes support both price stability and sustainable economic growth.

 Also Read: RBI Set to Pause in October, But a Policy Shift Looms Ahead: BofA Securities