A hotter-than-hoped inflation report has pulled the Federal Reserve’s next move into focus. September consumer prices rose 0.6% from August, and core inflation came in above forecasts, leaving traders pricing roughly even odds of another rate hike at the central bank’s meeting on October 27-28.
What the September CPI showed
According to Reuters reporting on the Labor Department data, headline CPI climbed 0.6% on the month after a 0.4% gain in August, in line with economists’ expectations. Over 12 months, inflation accelerated to 3.7% from 3.4%.
Energy did most of the work. Gasoline prices jumped 9.1% and accounted for more than half of the monthly increase, while diesel prices reached record highs. That raises a familiar worry: higher transport costs can eventually filter into grocery bills.
- Headline CPI: +0.6% month over month, +3.7% year over year.
- Core CPI (excluding food and energy): +0.3% on the month versus a 0.2% forecast in a Reuters poll, and +2.6% year over year, up from 2.4% in August.
- Food: flat on the month, with grocery prices down 0.1% and up 1.8% from a year earlier.
Core inflation is the harder part
Energy swings can reverse, which is why policymakers watch the core reading closely. Core CPI rose 0.3% for a second straight month. Shelter increased 0.4%, used cars and trucks rose 0.7%, and airline fares climbed 1.2%. Core PCE, the gauge the Fed uses for its 2% target, stood at 3.0% in August.
The gap between a 2.6% core CPI rate and a 3.0% core PCE rate is a reminder that the two measures can tell slightly different stories, and that neither is yet back at target.
The Fed’s position
In September the Fed raised its benchmark rate by 25 basis points to a range of 3.75% to 4.00%, its first hike in three years, and officials signaled more increases could follow. Until this week, many economists had expected the next move in December.
The CPI report changed that calculation. According to CME FedWatch, as cited by Reuters, markets now price about a 52% chance of a hike at the October 27-28 meeting, up from about 22% before the data. Earlier in the cycle, odds of further tightening had faded after weak September payroll gains and cooler-than-expected PCE readings for July and August.
Fed Chair Kevin Warsh set a hawkish tone at the Jackson Hole symposium in late August, saying policymakers would “have work to do” if they lacked confidence that inflation was returning to 2%. Jeffrey Roach, chief economist at LPL Financial, said the report “complicates the Fed’s decision this month” and that “the last mile back to target could remain bumpy and keep interest rates elevated.”
Market reaction and the energy backdrop
Treasury yields were mostly higher after the release, the dollar gained against a basket of currencies, and US stocks opened lower. The energy picture remains a key swing factor: Newsquawk’s weekly calendar noted WTI crude settling at $101.41 a barrel and Brent at $109.86, levels that feed directly into the gasoline component of CPI.
What to watch next
- Fed commentary: Speakers including Waller, who has said more hikes are likely needed with flexibility over the pace, will shape expectations before the meeting.
- Energy prices: Further moves in crude and gasoline would change the headline inflation path quickly.
- Labor data: A rebound after September’s weak payroll gains would strengthen the case for tightening.
- Politics and households: A Reuters/Ipsos poll found about 78% of Americans blame Trump’s policies, including tariffs and the Middle East conflict, for rising prices, with midterm elections set for November 3. The Social Security Administration also set a 3.6% cost-of-living adjustment for 2027.
The bottom line
A roughly 52% market-implied probability is not a forecast, and it can swing sharply with each data release or Fed speech. The September report shows inflation re-accelerating on both headline and core measures, which is why a hike that looked unlikely a few weeks ago is now a coin flip.
This article is for informational purposes only and is not investment advice.
Sources: Reuters (via Devdiscourse), The Star (Reuters), Newsquawk.
