Breaking: US CPI inflation softens to 3.2% vs. 3.3% forecast

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), declined to 3.2% on a yearly basis in October, the US Bureau of Labor Statistics (BLS) reported on Tuesday. This reading came in below the market expectation of 3.2% and September's inflation print of 3.7%.

Follow our live coverage of the US inflation report and the market reaction.

The Core CPI, which excludes volatile food and energy prices, rose 4% in the same period, compared to analysts' estimate of 4.1%. On a monthly basis, the CPI remained unchanged, while the Core CPI increased by 0.2%.

"The index for shelter continued to rise in October, offsetting a decline in the gasoline index and resulting in the seasonally adjusted index being unchanged over the month," the BLS said in the press release. "The energy index fell 2.5% over the month as a 5.0% decline in the gasoline index more than offset increases in other energy component indexes."

Market reaction to US CPI data

The US Dollar came under heavy selling pressure with the immediate reaction. At the time of press, the US Dollar Index was down 0.65% on the day at 105.00 and the benchmark 10-year US Treasury bond yield was down nearly 3% on the day at around 4.5%.

Assessing the impact of the US inflation data on markets, "the CPI report joins the Nonfarm Payrolls (NFP) report, which showed an increase of only 150,000 jobs in October. That was below the pre-pandemic norm of just under 200,000, but still pointing to growth," said FXStreet Analyst Yohay Elam and added:

"A soft-landing scenario is perfect for stocks, as companies benefit from both lower rates but healthy consumer demand. For the US Dollar, the data is adverse – expectations for lower borrowing costs weigh on the Greenback, while the currency does not benefit from safe-haven flows. A recession is not on the horizon." 

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This section below was published at 03:00 GMT as a preview of the US October inflation data.

• The Consumer Price Index in the US is forecast to rise 3.3% YoY in October, down from the 3.7% increase recorded in September.
• Annual Core CPI inflation is expected to hold steady at 4.1% in October.
• US CPI inflation report could significantly impact the US Dollar’s valuation by altering the market pricing of the Fed’s rate outlook.

The highly-anticipated US Consumer Price Index (CPI) inflation data for October will be published by the Bureau of Labor Statistics (BLS) at 13:30 GMT. 

The US Dollar (USD) has been holding steady against its major rivals, while struggling to gather bullish momentum following the July-October uptrend that saw the USD Index gain nearly 6%.

Although Federal Reserve officials remain committed to the data-dependent approach to monetary policy, the Federal Reserve (Fed) is widely expected to leave the interest rate unchanged at the 5.25%-5.5% range this year. According to the CME Group FedWatch Tool, markets are pricing in a more than 80% probability that the Fed will stand pat on policy at the December meeting. While speaking at a conference organized by the International Monetary Fund (IMF) last week, "we are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation," Fed Chairman Jerome Powell said. 

US CPI inflation data could influence the market positioning regarding the Fed’s rate outlook, especially after Powell at the IMF event also said that they were not confident that they have achieved a “sufficiently restrictive” policy stance to bring inflation down to 2%.

What to expect in the next CPI data report?

The US Consumer Price Index, on a yearly basis, is expected to rise 3.3% in October, at a softer pace than the 3.7% increase recorded in September. The Core CPI figure, which excludes volatile food and energy prices, is forecast to rise 4.1% in the same period, matching the September print.

The monthly CPI and the Core CPI are seen rising 0.1% and 0.3%, respectively. Following four consecutive months of gains, Oil prices turned south in October, with the barrel of West Texas Intermediate falling 10%. Easing concerns over the Israel-Hamas conflict turning into a widespread conflict in the Middle East force Oil prices to remain pressured.

Previewing the US October inflation report, “core price inflation likely gained speed for a third month straight, printing a ‘soft’ 0.4% m/m increase,” said TD Securities analysts and explained:

“Goods prices likely added to inflation, while the housing segment probably slowed. Airfares/lodging will again be key wildcards. We also expect falling gas prices to help tame October headline inflation. Our m/m forecasts imply 3.3%/4.2% y/y for total/core prices.”

In the meantime, the Prices Paid Index of the ISM Services PMI survey edged slightly lower to 58.6 in October from 58.9, while the Price Index of the Manufacturing PMI rose to 45.1 from 43.8. These readings showed that input price pressures in the service sector remained strong in October and the deflation in the manufacturing input costs continued. 

When will the Consumer Price Index report be released and how could it affect EUR/USD?

The Consumer Price Index inflation data for October will be published at 13:30 GMT. A monthly core inflation reading of 0.5% or higher could attract hawkish Fed bets and provide a boost to the USD with the immediate reaction. On the other hand, a weak Core CPI increase of 0.2% or less could confirm a no change in the Fed policy and weigh on the currency. The market positioning suggests that a USD rally is likely to have more momentum behind it than a sell-off. 

FXStreet analyst Yohay Elam said that it would take “nasty upside surprises of 0.2% or more” for markets to reassess the Fed’s outlook. 

“If the data surprises to the downside, the party on Wall Street would continue, while the US Dollar would suffer another blow,” Elam added. “In case data comes out as expected, the drop in headline inflation will likely trigger an immediate positive impact on equities and put pressure on the US Dollar – even if Core CPI remains stubbornly elevated.” 

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: 

“The Relative Strength Index (RSI) indicator on the daily chart stays slightly above 50, showing a lack of directional momentum. EUR/USD holds dangerously close to 1.0650, where the Fibonacci 23.6% retracement of the July-October downtrend is located. A daily close below this level could attract technical sellers and open the door for an extended decline toward 1.0600 (psychological level) and 1.0500 (static level, psychological level).”

“The 1.0750 level (Fibonacci 38.2% retracement) aligns as first resistance before 1.0800 (100-day Simple Moving Average (SMA), 200-day SMA). If the pair climbs above this level and starts using it as support, it could be seen as a convincing sign that EUR/USD is in an uptrend. In this scenario, 1.0850 (Fibonacci 50% retracement) and 1.0950 (Fibonacci 61.8% retracement) could be set as next bullish targets.”