Inflation is not as hot at the moment.
Hence, your wallet and your portfolio could be getting an extra special year-end bonus.
New softer-than-expected inflation data boosted expectations that the Federal Reserve will cut interest rates multiple times in the near future.
Economists say the latest consumer price report gives policymakers the “cover” they need to shift their focus toward the slowing U.S. labor market.
The inflation read came just days before the Federal Open Market Committee meets and where a cut to the benchmark Federal Funds Rate is widely anticipated.
- The Consumer Price Index for September rose less than economists forecast, offering fresh evidence that price pressures are continuing to moderate.
- Economists see this CPI report as pivotal, signaling that inflation may be easing.
A series of rate cuts could stimulate spending and investment, contributing to a more robust economy and erasing fears of stagflation or recession.
“The numbers are quite positive, and going forward, it certainly clears the way for the Fed to cut rates next week as they were going to anyway,” said Eric Gerster,chief investment officer at AlphaCore Wealth Advisory. “It certainly leads to a higher expectation of at least two more rate cuts by March.”
Image source: Caballero-Reynolds/AFP via Getty Images
Economists: Cooling inflation gives Fed ‘breathing room’
The CPI data added to evidence that the Fed’s campaign to bring inflation closer to its 2% target is making progress.
With inflation easing, tariffs clouding the outlook and employment indicators weakening, the Fed’s December meeting is shaping up as another key turning point in its post-pandemic policy cycle.
Still, analysts note that the central bank faces a delicate balance to maintain its dual mandate of full employment and price stability:
- Cutting too quickly could reignite price growth.
- Waiting too long risks pushing the labor market further into decline.
Jobless claims and hiring data have softened in recent months, a trend that some Fed officials have said warrants a more cautious approach.
Wage growth has slowed, and several regional Fed surveys point to weaker business confidence and softer consumer demand.
CPI strengthens case for multiple Fed rate cuts
Markets quickly priced in a near-100% probability of another quarter-point cut in December, according to the widely watched CME FedWatch tool.
That would follow the expected 25-basis-point reduction at the Fed’s Oct. 29–30 meeting, extending a series of so-called “insurance cuts” aimed at cushioning the economy from slowing growth, sticky tariffs, and weakening hiring.
“It’s nice to see CPI come in a tick lower than expectations,” said Mona Mahajan, senior investment strategist at Edward Jones. “It gives the Fed a little more cover to pursue the rate-cutting path it outlined in September, even with the lack of full labor-market data. The Fed is on this path toward neutral.”
The softer inflation reading reflects easing energy costs and slower growth in core categories such as housing and transportation, though economists caution that some price pressures remain stubborn particularly in services and goods affected by ongoing tariff disputes. (Oh, Canada!)
Fed faces pressure to support jobs and growth amid risks
The Fed has clearly signaled that for now, it’s prioritizing the jobs market over the inflation fight. That means further rate cuts ahead, and the next logical step would be December.
Peter Cardillo, chief market economist at Spartan Capital Securities
Financial markets have welcomed the cooling inflation and the Fed’s dovish turn.
Investors are betting that looser policy will help sustain economic growth into 2026 despite headwinds from the current government shutdown and trade-related price distortions.
Still, not all economists see a straight path to deeper cuts.
Jeremy Schwartz, senior U.S. economist at Nomura, warned that “underlying inflation pressures are still there. As long as you’re tolerating a little bit more inflation, this is a good report.
“It’s going to encourage the Fed to keep on that path of insurance cuts or normalization, but not to overdo it,” he said.
Related: CPI inflation data arrives as Fed interest rate decision looms
