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with market expectations that inflation will continue to decline, the door appears to be open for the federal reserve to cut interest rates further. however, some analysts warn that inflation is not dead and that the market may not be able to ignore it for much longer.

the market generally expects inflation to continue to cool in september

the market expects the september cpi to be released next thursday to rise slightly by 0.1% month-on-month, the lowest increase in the past three months, and a year-on-year increase of 2.3%, which is the sixth consecutive month of slowdown and the most moderate growth since the beginning of 2021.

the core cpi data, which excludes food and energy price fluctuations, is expected to increase by 0.2% month-on-month and 3.2% year-on-year. ppi data released next friday is also expected to slow down.

in addition, the market will also focus on the speeches of many federal reserve officials in the coming week, as well as the us core pce inflation in september released on the 31st of this month.

bloomberg economist anna wong and others analyzed that:

“we expect september headline cpi data to be tame and that core pce inflation (the fed’s favored inflation measure) is likely to increase at a pace consistent with the fed’s 2% target. all in all, we do not think the inflation report will add to the fomc’s view of the continued downward trend in inflation. confidence makes a big difference.”

but is inflation really reassuring enough?

although market expectations for inflation are more optimistic, some analysts warn that investors should remain vigilant because the risk of inflation has not completely disappeared.

analysts pointed out that the most obvious unexpected factor is geopolitics. tensions in the middle east show no sign of cooling, and an israeli attack on iranian oil facilities or iranian retaliatory actions in a vital energy waterway could send oil prices soaring and herald a return to inflationary pressures.

on the other hand, if u.s. employment data continues to grow faster than expected, the market will also need to be wary of the inflation risks behind wage growth.

this friday's non-farm payrolls data exceeded expectations, adding another sign of a soft landing for the u.s. economy and suppressing market expectations for a sharp 50 basis point interest rate cut. against the background of economic resilience and cooling inflation, the market expects a 99% probability of the federal reserve cutting interest rates by 25 basis points in november, and may cut interest rates by a total of 125 basis points by june next year. moreover, federal reserve chairman powell hinted at the national association of business economics on monday that interest rates may be cut by 25 basis points at two meetings this year.

the non-farm payrolls report in september showed that average hourly earnings increased by 4% year-on-year, which was higher than the 3.9% increase in august and the highest since may. if these trends continue, market expectations for longer-term interest rate cuts will appear overly optimistic.

economist mohamed el-erian said:

"september's unexpectedly hot employment report reminded people that "inflation has not disappeared." this report is a revision of the market's expectations for the federal reserve's overly aggressive interest rate cuts, helping the market to more accurately predict the federal reserve's possible actions. the federal reserve may need to refocus instead of focusing on curbing price increases, stop discussing that the fed should only focus on employment rates.”

furthermore, the u.s. presidential election before the federal reserve’s november meeting will bring more turbulence and uncertainty.