Updated Inflation Data: Five Key Takeaways

Headline CPI revealed an inflation backdrop that is less worrisome than feared. With a monthly increase of 0.3%, lower than the consensus forecast of 0.4%, and a year-over-year increase of 3% against a consensus estimate for 3.1%, concerns of a tariff related inflation spike appear to have been overdone. Core CPI, stripping out food and energy, increased 0.2% month-over-month. This was also below estimates from Wall Street, and both core goods and services inflation showed a deceleration from the August rate. Shelter costs appear to have been disinflationary, with an easing in owners’ equivalent rent contributing to the overall positive CPI report this month. At over 35%, shelter costs are a hefty weighting in the inflation data.

Expectations for an October rate cut rose slightly after the release of the inflation report, although the market had already priced in over a 90% probability of a cut later this month. Currently, the market is pricing in two additional rate cuts in 2025, which would bring Fed easing to a total of 75 basis points for the year.

The Federal Open Market Committee is scheduled to meet October 28 and 29, and with a better-than-expected inflation print and continued fears related to weakness in the labor market, we think the market is getting it right: The Fed will cut the policy rate. That said, it is unlikely that Fed Chair Powell will make any promises related to December, and it is nearly certain that he will reiterate the Fed’s data dependence. 

An immediate bond market reaction to the softer inflation data was as expected: Yields fell across the yield curve. Importantly, however, yields had been falling even before the release of the benign inflation data with the U.S. 10-year Treasury yield slipping below 4%. The bond market is not only forecasting a series of interest rate cuts but also an economy that is slowing down — although avoiding a recession. Both nominal and inflation-adjusted 10-year Treasury yields have fallen during the month of October, aligned with our own outlook for a U.S. soft landing. Although we remain vigilant around the upside risk to inflation related to tariff influences, our base case calls for more moderate inflation with a slowdown of growth, which allows the Fed to continue to modify monetary policy.

The U.S. risk asset market reaction to the inflation data was bullish all around, particularly in the growth sectors of the equity market where the tech-heavy Nasdaq rose by over 1%. Friday’s momentum took major averages to record closes to cap off a positive week of returns.

Along with the positive response to inflation data, investors are also reacting to a very solid earnings season where corporate results have generally surprised to the upside and led analysts to increase the blended earnings growth rate by 1% since the start of the season. With roughly 30% of the S&P 500 having reported earnings so far — and over 80% beating consensus expectations — we look to be on track for a fourth consecutive quarter of double-digit growth.