Cooling CPI Components Strengthen the Case for a Further Fed Rate Cut
Overview
The first incoming figures are expected to be weak, but not uniformly negative across all indicators.
A key focus remains the Consumer Price Index (CPI) — both for its influence on potential
further “political” rate cuts and for its role in real wage calculations, where CPI serves as the deflator.
A drop in CPI would therefore support both another rate reduction and stronger real earnings growth.
1. Key Components Driving CPI Trends
1a. Shelter – 40% of the Index
Mortgage rate data from the Federal Reserve (FRED) show a notable cooling trend over the past two months:
- August: Jumbo 6.70%, Regular 6.58%
- September: Jumbo 6.54%, Regular 6.31%
(-16 bp / -27 bp vs previous month → -2.36% / -4.23%) - October: Jumbo 6.44%, Regular 6.21%
(-10 bp / -10 bp vs previous month → -1.47% / -1.54%)
The cumulative two-month change — a 26 bp decline in jumbo loans (-3.88%)
and 37 bp in regular loans (-5.62%) — reflects a clear cooling in the shelter component,
which should exert downward pressure on the overall CPI.
1b. Energy Prices – EIA Data
Energy costs also show mixed but generally softening trends:
- Regular gasoline (pump average): September $3.166 → October $3.052 (-3.60%)
- Diesel (N2): September $3.748 → October $3.693 (-1.47%)
- Natural Gas (Henry Hub cash): September $3.071 → October $3.329 (+8.40%)
Despite the natural gas uptick, the overall energy basket impact remains deflationary,
as gasoline and diesel hold a heavier weighting in the CPI calculation.
Moreover, stable natural gas prices for utilities contrast with the previous months’ CPI surge in electricity costs.
1c. Real Yield Deflator (10-Year Note)
FRED’s 10-Year Real YTM Note shows a subtle but meaningful easing:
- July: 2.38%
- August: 2.38%
- September: 2.37%
- October: 2.31%
This modest decline of 7 basis points in October partially validates
the 25 bp Fed rate cut already implemented — suggesting the easing cycle
may continue if inflation momentum slows further.
2. CPI Base Comparison and Outlook
Comparing recent base effects:
- September CPI MoM: +0.16%
- October CPI MoM: +0.12%
Even a modest +0.20% to +0.25% monthly increase for September–October 2025
would push headline CPI YoY near 3%. However,
the continued cooling in shelter and energy provides a strong case
for a decline in YoY inflation — paving the way for an additional
“political” rate cut in the coming months.
Market interpretation: Very positive.
3. USD Strength and Global Capital Flows
Over the past two months, the U.S. dollar has appreciated:
- +1.33% vs Euro
- +4.23% vs Yen
- Stable vs Chinese Yuan and Mexican Peso
This sustained USD strength indicates a renewal of foreign capital inflows
into U.S. fixed-income and equity markets — further reinforcing
investor confidence in U.S. macro stability and policy direction.