Fed's Goolsbee Downplays Inflation Uptick, Economists Hold Steady On November Rate Interest Rate Cut Call

A stronger-than-expected September Consumer Price Index (CPI) report has not shifted the overall market narrative of continued disinflation, nor has it altered expectations for a potential interest rate cut in November.

Headline inflation came in slightly above forecasts. However economists and Federal Reserve officials remain focused on the broader trend of cooling price pressures and a softening labor market.

The Consumer Price Index (CPI) rose by 2.4% in September from a year earlier. That’s a slight decrease from August's 2.5% but still surpasses expectations of 2.3%. Core inflation, which strips out volatile food and energy prices, unexpectedly ticked up from 3.2% to 3.3%. This defied analyst forecasts for no change.

Simultaneously, the U.S. labor market experienced jobless claims jump to 258,000. Despite the sharp increase, experts attribute this surge to temporary disruptions rather than underlying structural labor market weaknesses.

Goolsbee: ‘Inflation Has Come Down a Lot’

Austan Goolsbee, president of the Chicago Federal Reserve Bank, downplayed the significance of the slight uptick in inflation. The broader trend of disinflation remains intact.

In a Thursday interview with CNBC, Goolsbee said: “The overall trend over 12 to 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is.”

Goolsbee also mentioned that the Fed is shifting toward a more balanced risk environment. This indicates that the Federal Open Market Committee could cut interest rates gradually over the next 12 to 18 months.

Economist Takeaways: Core Goods Surge, Hurricanes And Strike Distort Data

Economists have voiced mixed reactions to the CPI data.

Stephen Juneau, an economist at Bank of America, highlighted the surprising strength in core goods prices, which rose 0.17% month-over-month.

“Core goods rose by 0.17% owing largely to a 1.1% increase in apparel,” Juneau said, noting that apparel prices can be particularly volatile and advising not to overreact to this uptick.

He added, “We do not think goods prices will continue to rise by 0.2% m/m. However, supply chain disruptions and rising import prices likely mean goods prices will no longer be a key driver of disinflation.”

Joe Brusuelas, chief economist at RSM US LLP, warned that hurricanes Helene and Milton would distort growth, inflation, and employment data for the fourth quarter.

“At this point, the October jobs report will likely show flat or negative growth in total employment and an increase in unemployment,” Brusuelas said, indicating that clean economic data might not emerge until late 2024 or early 2025.

Despite these disruptions, Brusuelas remains confident. September inflation data and short-term economic challenges won't derail the Fed's plans to cut rates, he says.

The Fed will lower interest rates by 25 basis points in November, followed by another cut in December, he added. “We are confident that the Federal Reserve remains on a path to cut the Federal Funds rate.”

Goldman Sachs economist Jan Hatzius highlighted volatility in specific CPI components, such as airfares and car insurance.

“This month featured another strong increase in the volatile airfares component (+3.2%) and a 1.2% rise in car insurance,” Hatzius said. He expects these categories to cool in the coming months.

Regarding the increase in unemployment claims, Hatzius pointed to Hurricane Helene, auto layoffs and Boeing strikes in Washington and Oregon.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, reassured investors that the broader economy remains strong. “It is still likely that the Fed will go ahead and cut by 25 bps next month,” he said. If labor and inflation data remain steady, another cut could follow in December, he added.

An out-of-consensus voice came from Quincy Krosby, chief global strategist for LPL Financial. Krosby suggested that the current data could reignite concerns over stagflation, a condition where inflation rises even as growth slows.

“Today’s report is sure to spark concerns that a mild form of stagflation is beginning to take hold,” he said.

The expert highlighted the potential for more discussions among Fed officials about balancing their dual mandate of stable prices and full employment.

At midday trading in New York, the S&P 500 index, tracked by the SPDR S&P 500 ETF Trust (SPY) , traded flat.

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