The latest reading on inflation arrives on Oct. 12 with the September Consumer Price Index (CPI), the results of which are likely to influence the U.S. Federal Reserve’s future direction on interest rates and could lead to gyrations in the stock market.
The CPI report is one of the Fed’s key inflation indicators, and policymakers will be watching closely for signs of whether consumer prices are trending lower or remaining stubbornly high. The September reading will likely greatly influence whether the central bank raises interest rates at the conclusion of its next policy meeting on Nov. 1.
Markets will no doubt react immediately to the Oct. 12 CPI report.
Core Inflation Measures
Inflation has been trending in the wrong direction lately, increasing the likelihood that the U.S. central bank will again raise interest rates. Fed Chair Jerome Powell said as much a few weeks ago, when he stated that markets should be prepared for another rate hike this year. The hawkish comments followed Consumer Price Index reports that showed headline inflation climbed to 3.7% year-over-year in August, up from a year-to-date low of 3% in June.
“The process of getting inflation sustainably down to 2% has a long way to go,” said Powell when telegraphing that further interest rate increases are likely as the central bank wrestles inflation back down to its 2% annualized target.
However, while headline, or total, inflation has trended upward in recent months, core inflation that excludes volatile food and energy prices, continues to decline, dropping to 4.3% in August from 4.7% in July. Core inflation is the gauge that the Fed focuses on the most when making interest rate decisions. Economists expect that core CPI will slow further in September to 4.1%, which would alleviate the central bank’s need to further raise interest rates.
Market Volatility
Stock markets have been volatile since the Fed’s last decision on interest rates was made on Sept. 20. While the central bank held its benchmark Federal Funds Rate within its current band of 5.25% to 5.50%, it signaled that interest rates are likely to rise further and remain elevated longer than previously expected. This “hawkish hold” on the part of the Fed has sent the stock market into fits as traders and investors adjust to a more restrictive monetary policy environment.
All eyes now turn to the Oct. 12 release of the Consumer Price Index for September. If inflation rose in September, it will increase the chance of the Fed raising rates again on Nov. 1 and stocks can be expected to selloff as a result. Lower inflation and the central bank is likely to hold off on additional interest rate increases. Markets could stage a relief rally in that case. Either way, investors should brace for enhanced volatility in the days ahead.
What’s Next
Traders and investors are likely to be tense in the lead-up to the Oct. 12 CPI reading, hoping for the best when it comes to inflation but preparing for the worst. Expectations surrounding the upcoming inflation data have been ratcheted higher after the jobs report released on Sept. 6 showed the U.S. labor market remains strong and resilient despite the highest interest rates in 22 years. Whatever the outcome of the CPI report on Oct. 12, investors should prepare themselves for a big market reaction.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
