Markets begin pricing summer rate cuts as US inflation eases to 3.2% in October

Prices did not change throughout the month, representing only the second month since May 2020 where month-on-month inflation did not rise.

Lindsay James, investment strategist at Quilter Investors, said the data “offered a further signal that the Federal Reserve’s work on interest rates is probably done”.

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Following the release of the inflation figures, markets solidified their belief that the Fed had finished its hiking cycle.

Odds for the Fed’s 13 December meeting to keep rates steady increased to 99.7%, up from 85.5% a day ago, while the odds of a rate hike next year decreased to just 4.1%, according to the CME FedWatch tool.

Meanwhile, interest rates being cut at the central bank’s May meeting are now seen as the most likely outcome, at 64.6%, up from 34.3% yesterday.

Inflation had sat at 3.7% throughout August and September, after hitting a two-year low of 3% in June.

October’s fall in annualised inflation was largely caused by gasoline prices, which saw its largest monthly drop since May, falling 5% throughout the month.

Other areas that saw prices decline included lodging away from home, used cars and trucks, communication and airline fares.

This was offset largely by the continuing rise of shelter, which rose by 0.3% throughout the month and has increased 6.7% over the last year.

Core inflation, which excludes food and energy costs, has steadily declined throughout the year, falling from 5.6% in January to 4% in October, its lowest level in over two years.

“Although core inflation is currently declining only slowly, there are increasing signs this will speed up in early 2024 amidst a softening economic backdrop,” James added.

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Richard Flynn, managing director at Charles Schwab UK, said that the fall in inflation figures had made the “prospect of a soft landing ever more likely”.

“The drop in inflation suggests that recent monetary policy has been doing its job,” Flynn said. “This good news reinforces the likelihood that the central bankers will hold off from further rate hikes in this cycle, which is the direction they seem to be leaning in any case.

“With wage growth slowing and sectors such as manufacturing losing pace, there is a risk that further tightening could trigger a problem in the economy.

“Higher rates in the US would also make it more expensive to borrow in US dollars, creating difficulties for emerging-market economies that do so. All in all, ‘higher for longer’ looks like a much more sensible move than ‘even higher’.”