New data from the United States has strengthened expectations that the Federal Reserve will cut interest rates at its upcoming policy meeting in December. The central bank's preferred inflation gauge showed price pressures remained largely contained in September, offering policymakers room to support a slowing economy.
Inflation Holds Steady, Core Pressures Ease
The Commerce Department, in a report delayed by five weeks due to a government shutdown, stated that prices rose 0.3% in September from August, matching the increase seen in the previous month. A closer look at the core inflation figure, which excludes the volatile food and energy sectors, showed a 0.2% rise, also unchanged from August.
On an annual basis, the overall inflation rate edged up slightly to 2.8% from 2.7% in August. However, the more closely watched annual core inflation rate showed a marginal cooling, easing to 2.8% from 2.9%. This data indicates that underlying price pressures, while persistent, are not accelerating wildly.
A Difficult Policy Choice for the Fed
Economists interpret the latest numbers as pointing to muted core inflation, which bolsters the argument for a rate cut. This comes even as the headline inflation figure remains above the Fed's long-term target of 2%. Analysts note that while President Donald Trump's tariffs continue to exert upward pressure on prices, Federal Reserve officials believe that factors like slower hiring, modest economic growth, and subdued wage gains should help cool inflation in the coming months.
Omair Sharif, chief economist at Inflation Insights, suggested that Friday's report would likely reassure policymakers that core inflation is under control. However, he highlighted one persistent worry: a measure of services inflation that remains stubbornly high. "It hasn't really shown any sign of slowing down," Sharif noted, adding, "That has to be concerning for them."
The Fed now faces a complex decision. Under normal circumstances, with inflation above target, it would keep interest rates high. But with signs of economic softness emerging—hiring is weakening and the unemployment rate has crept up to a four-year high of 4.4%—the central bank is leaning towards a cut to stimulate borrowing and economic activity.
Mixed Signals from the Broader Economy
The inflation report was accompanied by other economic indicators that painted a mixed picture. Consumer spending increased by 0.3% in September, a slowdown from the 0.5% growth witnessed in August, signalling softer household demand. However, early holiday season data provided a glimmer of hope; Adobe Analytics reported a 7.7% jump in online spending over the five-day Black Friday period.
On a positive note, household incomes grew by 0.4% in September, marking the second straight month of solid growth. Yet, the broader landscape is uneven. The housing market is stagnant, and manufacturing sectors are cutting jobs. These weaknesses are partially offset by heavy investment in artificial intelligence data centres, which is providing some economic support.
A warning sign came from payroll processor ADP, which reported that businesses shed 32,000 jobs in November. Economists warn that if layoffs accelerate, consumers could sharply reduce their spending, further dampening economic growth. The government's official November jobs report, scheduled for release on December 16, is anticipated to show only a small gain in employment.
All eyes are now on the Federal Reserve's meeting scheduled for December 9-10, where the latest inflation and jobs data will be key factors in the decision to potentially lower interest rates.
