The rise in consumer prices in September was stronger than expected

A closely watched report on U.S. inflation showed that consumer price increases fell on an annual basis in September but “core prices” remained stable, according to the latest data from the Bureau of Labor Statistics released Thursday morning.

The consumer price index (CPI) rose 2.4% year-on-year in September, a slight slowdown compared to the 2.5% annual price increase in August. The annual increase was stronger than economists expected, an annual increase of 2.3%.

The index rose 0.2% from the previous month, matching August's rise and also larger than economists' expectation of a 0.1% rise.

On a “core” basis, which excludes the more volatile costs of food and gas, prices rose 0.3% in September from the previous month, beating economists' expectations of a rise of 0.2% and 3%, respectively .3% compared to the previous year. Core prices rose 0.3% month-on-month and 3.2% year-on-year in August.

Although inflation moderated, it remained above the Federal Reserve's 2% target on an annual basis.

But the Federal Reserve has recently turned its attention to the state of the labor market, which has shown surprising resilience amid high interest rates.

Data from the Bureau of Labor Statistics released Friday showed the labor market added 254,000 jobs in September, more than the 150,000 economists expected, while the unemployment rate fell to 4.1% from 4.2%.

The strong report changed expectations for interest rates moving forward, with traders now pricing in a smaller 25 basis point cut in November rather than another huge 50 basis point cut.

Federal Reserve minutes released Wednesday showed that while a “significant majority” of officials at their September meeting supported the larger cut, “some” wanted the smaller option, citing a resurgence in inflation as a key concern.

Immediately after Thursday's inflation data, markets priced in a more than 80% chance that the central bank would cut interest rates by 25 basis points in November, compared with just 50% a month ago, according to the CME FedWatch tool.

Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and send her an email at [email protected].

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