A closely watched report on US inflation showed consumer price increases ticked lower on an annual basis during the month of September but "core" prices remained sticky, according to the latest data from the Bureau of Labor Statistics released Thursday morning.

The Consumer Price Index (CPI) increased 2.4% over the prior year in September, a slight deceleration compared to August's 2.5% annual gain in prices. The yearly increase, which was the lowest annual headline reading since Feb. 2021, came in hotter than economist expectations of a 2.3% annual increase.

The index rose 0.2% over the previous month, matching the increase seen in August and also hotter than economist estimates of a 0.1% uptick.

On a "core" basis, which strips out the more volatile costs of food and gas, prices in September climbed 0.3% over the prior month, stronger than the 0.2% uptick economists had expected, and 3.3% over last year. Core prices rose 0.3% month over month and 3.2% on an annual basis in August.

Inflation, although moderating, has remained above the Federal Reserve's 2% target on an annual basis.

But the Federal Reserve has recently shifted its attention to the state of the labor market, which has been surprisingly resilient in the face of high interest rates.

Read more: Jobs, inflation, and the Fed: How they're all related

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

The strong report altered expectations about the path forward for interest rates, with traders now pricing in a smaller 25 basis point cut in November rather than another jumbo 50 basis point cut.

Minutes from the Federal Reserve released Wednesday showed that while a "substantial majority" of officials favored the larger cut at its September meeting, "some" wanted the smaller option, citing a resurgence in inflation as a primary concern.

On top of the inflation report, new jobless claims also came in hotter than expected, surging to their highest level since August 2023.

Following the data's release, markets were pricing in more than an 80% chance the central bank cuts by 25 basis points in November, compared to just a 50% shot one month ago, per the CME FedWatch Tool.

"If inflation data continues to indicate that prices are generally rising amid a backdrop of a cooler labor market, the Fed's next meeting will undoubtedly involve a more heated discussion of which of the Fed's mandates takes precedence," Quincy Krosby, chief global strategist at LPL Financial, wrote on Thursday.