US consumer prices rose by 0.2% in September from August, excluding energy and food by 0.3%. This is a tenth more than expected in each case. The data do not argue against further interest rate cuts by the Federal Reserve at its next meeting in November and beyond. But the big step of 50 basis points in September is likely to remain an exception, Commerzbank’s analysts Dr. Christoph Balz and Bernd Weidensteiner note.

Further decline in inflation appears to have stalled

“The better-than-expected labor market data for September have already removed the basis for speculation about a possible further big rate cut by the Fed. Now, the further decline in inflation also appears to have stalled. For the second month in a row, the consumer price index has surprised with a fairly strong rise in the core rate.”

“This is not reflected one-to-one in the personal consumption expenditure (PCE) deflator, the Fed's preferred measure of inflation. Some prices have risen very sharply for which the PCE deflator uses a different data source or which are weighted significantly lower in the PCE deflator.”

“However, the optimism regarding a continuous easing of price pressure could be dampened somewhat. The data environment therefore also argues for a cautious approach by the Fed. It will therefore not deliver another jumbo rate cut of 50 basis points. And even a small move of 25 bp may now no longer a foregone conclusion in the eyes of market participants. However, we are sticking to our forecast of a 25 bp cut at the November meeting. After all, the easing in service prices has continued. These will also set the direction in the medium term.”