With the general market expectation of continued downward inflation, the door for the Federal Reserve to further cut interest rates seems to have opened. However, some analysts warn that inflation is not dead, and the market's neglect of inflation may not last too long.

The market generally expects inflation to continue to cool down in September.

The market expects the September CPI to be announced next Thursday to have a slight month-on-month increase of 0.1%, the lowest increase in nearly three months, with a year-on-year growth of 2.3%, slowing down for the sixth consecutive month, and the mildest growth since early 2021.

Excluding the volatility of food and energy prices, core CPI data is expected to increase by 0.2% on a monthly basis and by 3.2% year-on-year. The PPI data to be released next Friday is also expected to slow down.

In addition, the market is also focused on speeches by many Federal Reserve officials in the coming week, as well as the US core PCE inflation for September, which will be announced on the 31st of this month.

Bloomberg economists including Anna Wong analyzed that:

"We expect the overall CPI data for September to be relatively mild, and core PCE inflation (the inflation indicator favored by the Federal Reserve) may grow at a pace consistent with the Fed's 2% target. In conclusion, we believe that the inflation report will not have too much impact on the FOMC's confidence in the continuing downward trend of inflation.

However, is inflation really reassuring?

Despite the market's optimistic expectations for inflation, some analysts warn that investors should remain cautious, as inflation risks have not completely disappeared.

Analysts point out that the most obvious unexpected factor is geopolitics. The tension in the Middle East shows no signs of easing, with Israel's attacks on Iran's oil facilities or Iran taking retaliatory actions in important energy routes, both of which could lead to a surge in oil prices and hint at the resurgence of inflationary pressures.

On the other hand, if US employment data continues to grow beyond expectations, the market also needs to be cautious of the inflation risks behind wage growth.

This Friday, the non-farm payroll data greatly exceeded expectations, adding to signs of a soft landing in the US economy, significantly reducing the market's expectations of a 50 basis point rate cut. Against the backdrop of economic resilience and a cooling of inflation, the market expects a 99% probability of a 25 basis point rate cut by the Federal Reserve in November, with a total cut of 125 basis points by June next year. Furthermore, Federal Reserve Chair Powell hinted on Monday at the National Association for Business Economics that there may be two rate cuts of 25 basis points each at the meetings later this year.

The September non-farm report showed an average hourly wage growth of 4% year-on-year, higher than August's 3.9%, the highest since May. If these trends continue, the market's expectations for a long-term rate cut will appear overly optimistic.

Economist Mohamed El-Erian says:

"The unexpectedly strong employment report in September reminds people that 'inflation has not disappeared,' this report corrects the market's overly aggressive rate cut expectations for the Federal Reserve and helps the market more accurately predict the Fed's possible actions. The Fed may need to refocus on curbing price increases and not discuss only focusing on the unemployment rate."

Furthermore, the upcoming US presidential election before the Federal Reserve's November meeting will bring more volatility and uncertainty.

Editor/Somer