Markets will be looking for any surprises out of Thursday’s big inflation report

Federal Reserve policymakers have been breathing easier lately regarding inflation, and that faith that they’re closer to achieving their goal will get a key test Thursday. The Labor Department will release its latest reading on the closely watched consumer price index, and its’ expected to show further progress toward the Fed’s 2% target in September. Specifically, the Labor Department’s reading is expected to show an annual inflation rate of 2.2% and a monthly gain of just 0.1%, according to the Dow Jones consensus. However, stripping out food and energy, the core rate is projected respectively at 3.2% and 0.2%, a far distance from what policymakers would like. The disparity could figure its way into how quickly the Fed decides to move during the nascent rate-cutting cycle. Officials slashed half a percentage point, or 50 basis points, off the benchmark overnight borrowing rate at the September meeting. However, following a much better than expected jobs report for September, Fed officials in recent days have indicated a likely more measured approach to cuts ahead. Details in Thursday’s report will matter: Housing inflation has proven to be stubborn, though policymakers still expect lower rent renewals to feed into the data the months progress. But a sudden uptick in items such as vehicle prices and other discretionary items might spook the Fed over whether persistently robust consumer demand could keep inflation elevated. In a speech Wednesday, Dallas Fed President Lorie Logan cautioned that “an unwarranted further easing in financial conditions could boost spending and push aggregate demand,” meaning that lower mortgage rates, higher stock prices and easing credit conditions could spur another spike in inflation. While Logan said she remains confident inflation will continue to drift back to the Fed’s target, she said upside risks to inflation mean the Fed “should not rush to reduce” rates aggressively “but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices.” The report hits just after the S & P 500 rose to a new record on Wednesday.