Inflation is expected to rise in October, raising concerns about Fed rate cuts

October’s annual inflation rate may have risen for the first time in seven months, suggesting that the period of steady price declines may be stabilizing after more than two years of gradual slowdown.

Donald Trump’s election victory has created significant uncertainty about future inflation trends and how the Federal Reserve might respond if inflation rises again. Trump has promised to curb inflation, primarily through expanded oil and gas drilling.

But mainstream economists warn that some of his proposals – including imposing high tariffs on imports and mass deportations of migrants – could have inflationary effects if fully implemented, potentially driving up costs in various sectors and complicating efforts to control inflation .

“Tax cuts and tariffs and other policy proposals have the potential to significantly impact inflation, inflation expectations and economic growth,” said Seema Shah, chief global strategist at Principal Asset Management. “Given uncertainties surrounding tax and trade policy, inflation pressures and economic resilience, the Fed will likely slow its pace of rate cuts.”

What is the current inflation rate?

Economists surveyed by FactSet estimated that consumer prices rose 2.6 percent year-on-year in October, compared with 2.4 percent in September. On a monthly basis, prices are expected to have increased by 0.2 percent from September to October, maintaining the same pace as the previous month. These numbers suggest a slight increase in inflation, potentially signaling a shift towards more stable price levels.

Excluding the often volatile food and energy sectors, core prices are expected to have risen 3.3 percent year-on-year, in line with the previous month’s rate. From September to October, core prices are expected to have risen 0.3 percent for the third straight month – a pace that, if maintained, would exceed the Federal Reserve’s inflation target of 2 percent. This steady rise in core inflation suggests ongoing pressures that could challenge the Fed’s inflation targets.

How will inflation affect the economy?

A rise in prices could increase concerns in financial markets that efforts to control inflation are losing momentum. That trend could cause the Federal Reserve to reconsider its plans to cut its key interest rate in December, despite earlier signals from officials pointing to possible rate cuts. Continued inflationary pressures could prompt the Fed to be more cautious in adjusting interest rates.

However, most economists remain optimistic that inflation will continue its downward trend over time. Consumer inflation, which peaked at 9.1 percent in 2022, has gradually eased, although prices are still about 20 percent higher than three years ago. These persistently higher costs have dampened public sentiment toward the economy and helped weaken confidence in the Biden-Harris administration’s economic management, contributing to Kamala Harris’ defeat in last week’s presidential election.

What does Trump’s victory mean for Wall Street?

Stock prices soared following Donald Trump’s election victory as investors expressed optimism about his proposed tax cuts and deregulation, which they expect to stimulate the economy and boost corporate profits. However, bond yields also rose, suggesting inflation could remain high or even rise further as markets weigh the impact of Trump’s economic policies on long-term price stability.

The economy is developing more robustly than expected and has grown by almost three percent annually in the last six months. This growth is largely due to strong consumer spending, particularly among higher-income households, which continues to boost economic activity and exceed earlier forecasts by economists.

This article contains reporting from The Associated Press