Last week's inflation data provided more evidence that the Federal Reserve is nearing its target. Just a few weeks ago, the Federal Reserve made a significant rate cut.

In September, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) were close to expectations, showing that the inflation rate is decreasing towards the Federal Reserve's 2% target.

In fact, economists at Goldman Sachs believe that the Federal Reserve may have been successful.

The top Wall Street investment bank estimated last Friday that the September Personal Consumption Expenditures Price Index (PCE) annual rate to be released by the U.S. Department of Commerce later this month will record 2.04%.

If Goldman Sachs is correct, this figure will be rounded to 2%, aligning with the Federal Reserve's long-term target. At this point, the U.S. inflation rate soaring to a 40-year high has triggered a round of aggressive rate hikes. The Federal Reserve tends to use PCE as its inflation indicator, but it is not the sole data it relies on.

Chicago Fed President Gulsby said in a CNBC interview last Thursday after the latest CPI data was released, "The overall trend over the past 12 to 18 months is clearly that the inflation rate has dropped significantly, and the labor market has cooled to what we believe is full employment level. We hope both can stay as they are now."

Some obstacles ahead

While controlling inflation may not be easy, the latest data shows that although prices have not fallen significantly from the worrying top reversal of a few years ago, their rate of increase is slowing down.

In September, the CPI recorded an annual rate of 2.4%, while the PPI was 1.8%. Goldman Sachs predicts the PCE annual rate will trend towards 2%, which is roughly in line with the Cleveland Fed's forecast.

The Cleveland Fed's 'Near-term Inflation Outlook' dashboard shows that the overall PCE annual rate for September will be 2.06%, rounded to 2.1%. However, the inflation annualized growth rate for the entire third quarter is only 1.4%, well below the Fed's 2% target.

It is certain that some warnings indicate that policymakers still have some work to do, especially as core inflation remains stubborn.

Goldman Sachs states that core inflation, excluding food and energy, is an indicator that the Fed believes can better measure long-term inflation trends. It is expected that the annual rate of core PCE in September will be 2.6%. Looking just at the CPI, core inflation in September is even worse at 3.3%.

However, Federal Reserve officials unexpectedly consider high housing inflation data as a major driver of core inflation. They believe that as the impact of declining rents plays out in the data, this trend will ease somewhat.

Fed Chair Powell, on September 30, mentioned the rental situation, indicating he expects housing inflation to continue to recede, and that the 'broader economic conditions also lay the groundwork for further anti-inflation measures.'

From a policy perspective, lower inflation opens the door for the Fed to continue cutting rates, especially as the Fed shifts its focus to the labor market, although there is some concern about the speed at which action should be taken.

The Federal Reserve lowered the federal funds rate by 50 basis points to a range of 4.75% to 5% in September, which is unprecedented for an expanding economy, with expectations that it will at least return to a normal pace of 25 basis points of rate cuts next month. Atlanta Fed President Bostic even expressed openness to skipping a rate cut at the November meeting last Thursday.

Senior analyst Kurt Rankin of PNC stated in an analysis report last Friday after the release of the PPI data, 'Aggressive loose monetary policies may stimulate consumer demand just as it enters a sustainable phase. This in turn will put pressure on businesses, forcing them to meet this demand, leading to a rise in their costs as they compete for necessary resources.'

Futures traders are betting that the Federal Reserve will almost certainly cut rates by 25 basis points at the November and December meetings.

Editor/Rocky