The U.S. Consumer Price Index (CPI) inflation is set to drop from an annual 3.7% rate in September to a 3.3% rate in October, marking the first drop since June 2023, according to the median economist consensus.

The eagerly awaited U.S. CPI report for October is set to be released by the Bureau of Labor Statistics at 8:30 a.m. ET on Tuesday, with investors and policymakers alike closely monitoring this crucial economic indicator.

While a decline is expected, the path to stabilizing inflation remains complex, with potential implications for future interest rate adjustments.

In his latest public remarks, Fed Chair Jerome Powell acknowledged that the journey to return inflation to the 2% target still has a long way to go. According to the Fed's economic projections from September, it is expected that the inflation rate will settle at 3.3% by the end of 2023 and decrease further to 2.5% by the close of 2024.

October CPI Preview: What Do Economists Expect?

  • The headline CPI inflation rate is projected to experience a notable decline. Economists anticipate a reduction from September's year-on-year rate of 3.7% to 3.3% in October. Such a decrease would be relevant, reflecting the first substantial deceleration in inflation since May 2023.
  • On a monthly basis, the headline CPI is expected to rise by a mere 0.1%, showing a marked slowdown from the 0.4% increase observed in September. This would represent the slowest monthly growth since May 2023. A significant factor in this deceleration is the reduction in gasoline prices, which have likely exerted downward pressure on the overall price index.
  • The core CPI, which strips out the volatile components of food and energy, is anticipated to remain steady at a 4.1% year-on-year rate, indicating a more persistent inflationary trend in these sectors.
  • On a monthly basis, the core CPI is expected to mirror September's 0.3% growth.
Bank of America's Forecast: December rate hike on the table

"Disinflation is not always a smooth ride," wrote Bank of America economists Michael Gapen and Stephen Juneau in the latest note.

They predict the headline CPI to increase by 0.2% on a monthly basis and 3.4% annually, with a possible rise in core inflation to 0.3% or even 0.4% month-on-month, and 4.2% year-on-year.

Core inflation should continue to be driven by sticky core services inflation, according to Bank of America. Such a scenario, higher than expected, would challenge the Federal Reserve's efforts to curb inflation.

If Bank of America's inflation projections are correct, they could influence another rate hike in December.

Ahead of the CPI release, major equity ETFs like the SPDR S&P 500 ETF Trust (SPY  ) and the Invesco QQQ Trust (QQQ  ) saw minor downturns, although they were up 5.3% and 7.2% month to date.

Long-dated Treasury bonds also dipped, with the iShares 20+ Year Treasury Bond ETF (TLT  ) down 0.8%, reflecting investor caution. According to the CME Group's FedWatch Tool, there's an 85% probability of no rate hike in December, with expectations of three rate cuts next year starting mid-2024.