Inflation and jobs

Inflation continued its slow and challenging decline in October, showing only modest changes from recent months(1). The consumer price index (CPI) rose 0.2% from September and 2.6% over the past year, marking the first rise in the inflation rate since March(1). Core inflation, which excludes food and energy, rose 0.3% for the third consecutive month, suggesting that underlying inflationary pressures have not changed significantly(1). High mortgage rates and stubbornly limited supply continue to make housing costs one of the primary drivers of inflation, making up over half of the monthly increase(1). With prices for goods starting to rise after a year of steady declines, the gradual decline in inflation may face more hurdles ahead(1).

Hiring slowed to its weakest pace since 2020, with only 12K jobs added in October, though the unemployment rate held at 4.1% and average hourly earnings saw a modest 4% yearly increase(2). Although severe hurricanes and the Boeing strike disrupted hiring in some industries, the broader data showed that the labor market continues to gradually cool(2). Job losses rose(2), but initial jobless claims through mid-November have stayed relatively low(3), indicating there has not been any material uptick in layoffs.

Consumer spending

On the positive side of things, retail sales rose 0.4% in October, building on an upwardly revised 0.8% increase in September, suggesting consumer spending remains resilient(4). The upward revision to September suggests consumers are entering the holidays on strong footing, supporting expectations for solid spending this holiday season. However, stubborn inflation and fewer shopping days between Thanksgiving and Christmas could negatively impact sales. In addition, some retailers have already signaled potential price hikes in anticipation of higher tariffs on imported goods(5). Consumer spending continues to benefit from stable income growth and access to credit, but financial pressures may limit spending as we move into the new year.

Bottom line

While inflation isn’t rising sharply, it’s also not declining as quickly as hoped. This may keep the Federal Reserve more cautious about lowering rates amid steady consumer spending and a labor market that is cooling, yet resilient. Several Federal Reserve officials have indicated a preference for gradually lowering borrowing costs, with Chair Powell emphasizing that the strong economy shows no urgency for rapid rate cuts. Amid firm inflation data and the cautious tone from Fed officials, traders have tempered their expectations for a quarter of a percentage point December rate cut(6). Clarity on the Fed’s policy path, including potential cuts projected for 2025, is expected when officials release their updated economic projections following their December meeting.

(1) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(2) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(3) Source: Department of Labor, https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20242342.pdf
(4) Source: Census Bureau, https://www.census.gov/retail/sales.html
(5) Source: Bloomberg News, https://www.bloomberg.com/news/articles/2024-11-07/steven-madden-targets-40-cut-to-china-imports-to-avoid-tariffs
(6) Source: CME Fed Watch Tool, as of November 15, 2024, https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html