In an interesting, though not radical, turn, the narrative around the US economy has taken on more complex tones, with data catching attention on both inflation and labour fronts.
The September inflation reading surprised markets with figures that exceeded expectations across the board, generating a subtle yet important shift in monetary policy expectations.
Annual headline inflation decelerated for the sixth consecutive month, reaching 2.4%, slightly above the projected 2.3%.
However, the biggest surprise came from core inflation, which, for the first time since Q1 2023, showed acceleration, reaching 3.3% annually, compared to the expected 3.2%. This increase reflects persistent inflationary pressures in key sectors, posing a significant challenge for monetary policymakers.
This shift in the inflation profile was accompanied by a rise in initial jobless claims, which reached 258,000, the highest level in 14 months. Although this metric tends to be volatile, the unexpected rise introduces a new layer of uncertainty to the economy, especially after the solid September NFP data, which had painted a more favorable picture of the labor market.
The impact on markets was immediate. US equities showed average declines of 0.2%, reflecting investor concerns about the uncertain economic outlook. Additionally, expectations around the Federal Reserve’s next monetary policy decision in November have shifted significantly.
Following the latest data, the probability of a 25-basis-point cut has risen to 88%, compared to the previous 80%. This shift balances concerns that the labor market may not be as strong as suggested by last week’s NFP data, and the possibility that inflation may be more persistent than previously thought.
Regarding the composition of inflation, energy prices continued to decline (-6.8%), driven by a sharp drop in gasoline and heating oil prices, which has eased the cost of living somewhat. However, food and transportation costs continue to exert upward pressure, with increases of 2.3% and 8.5%, respectively. This imbalance between inflation components adds complexity to the Fed’s task of stabilizing prices without severely impacting economic growth.
In summary, the US economy is showing mixed signals, with a labor market that remains relatively resilient, but with areas of uncertainty, and inflation that could prove more persistent than expected. These data reignite the debate between a “soft landing,” a “no landing,” and the possibility of a “hard landing,” though the latter remains more distant for now.
