Inflation was hotter than expected in September, but continued its downward trend

• Inflation cooled in September, but less than economists expected.
• The consumer price index increased 2.4% over the year, above the forecast of 2.3%.
• The unexpectedly hot inflation reading complicates the prospect of further rate cuts from the Fed.

Inflation came in hotter than expected in September.

The consumer price index, a closely-watched inflation measure, increased 2.4% from September 2023 to this past September. This index was expected to see a year-over-year increase of 2.3%, a cooler rate than August's 2.5%.

The year-over-year increase in the CPI was the smallest rise since February 2021, a Thursday news release from the Bureau of Labor Statistics said.

The surprisingly hot inflation reading is a sign that the economy is running strong, and complicates the Fed's next rate decision, since in theory higher inflation would make further cuts less likely.

Still, odds of a 25-basis-point rate cut at the central bank's November meeting ticked higher after the release, and now carries an 83% probability, according to the CME FedWatch tool.

That could be because the market also digested weekly jobless-claim figures that came in higher than expected. The Fed has been closely watching the labor market for signs of tightness, in addition to inflation for signals of what to do next with rates.

Following a surprisingly strong September jobs report, speculation rose that the Fed might slow its pace of rate cuts — or even stop them altogether. But the market appears largely convinced for now that a 25-basis-point move is coming in November.

"Despite the figures being hotter than expected, it seems highly unlikely that the September CPI figures will materially alter the FOMC policy outlook," Michael Brown, senior research strategist at Pepperstone, said. "The labor market has now become the primary determinant of future policy shifts."

Core CPI, which excludes volatile food and energy costs, increased 3.3% over the year in September after increasing 3.2% over the year in both July and August. It was expected that September's rate would be 3.2%.

The shelter index increased 4.9% over the year in September, meaning it cooled down from August's rate of 5.2%. Plus, the news release said, this accounted "for over 65 percent of the total 12-month increase in the all items less food and energy index."

The food index rose 2.3% for the 12 months ending September. That's greater than the 2.1% increase in August. The energy index took a big dip in September. It fell 6.8% year over year; it fell 4% in August.

The Fed will have other data to mull over before the meeting. The Employment Cost Index, a quarterly release that shows how much companies are paying in salaries and benefits, will be published on October 31. Plus, the next jobs report, which includes how job gains looked in October as well as potential revisions for September's and August's growth, will be out on November 1.

This is a developing story. Please check back for updates.