US September CPI to Be Released Tonight: Headline Inflation May Hit 5-Month High, Potentially Reshaping the Fed's Rate Path

Source: Jinshi Data

At 20:30 on Wednesday, the U.S. Bureau of Labor Statistics will release the September Consumer Price Index (CPI). The market expects that rising gasoline prices will drive a clear acceleration in headline inflation, but core inflation—excluding food and energy—may slow on a month-over-month basis. The divergence between the two indicators will serve as an important basis for assessing U.S. price pressures and the Federal Reserve's next policy move.

Ahead of the data release, Fed officials remain divided on the necessity and timing of further rate hikes. Cleveland Fed President Hammack said on Monday that U.S. inflationary pressures are spreading to more sectors of the economy, and monetary policy needs to tighten in the smallest possible increments and as frequently as necessary, though she remains open-minded about whether to raise rates at the end of October.

Headline CPI May Post Largest Gain in Five Months, Core Inflation Easing

According to a survey of economists by foreign media, U.S. headline CPI for September is expected to rise 0.6% month-over-month, up from 0.4% in August, likely marking the largest single-month gain in five months. The year-over-year rate is expected to rise from 3.4% to 3.6%. For core CPI, the month-over-month reading is expected at 0.2%, and the year-over-year reading at 2.5%.

Energy prices are the main factor driving headline inflation higher. Amid the ongoing conflict in the Middle East, international oil prices remain elevated, and U.S. retail gasoline prices briefly climbed to their highest level in four months.

Goldman Sachs expects energy prices to rise about 5% month-over-month in September, with food prices up 0.2%. Higher jet fuel costs could also push up airfare, with Goldman Sachs expecting ticket prices to rise about 3% during the month.

Core inflation may prove relatively moderate. Goldman Sachs expects used car, new car, and auto insurance prices all to rise, but housing inflation to continue slowing. Among these, owners' equivalent rent and actual rent are expected to rise 0.20% and 0.17% month-over-month, respectively.

Deutsche Bank economists, meanwhile, expect core goods prices to be broadly flat, with declines in used car and certain medical commodity prices potentially offsetting increases in leisure goods and information technology goods prices.

The Bloomberg Economics research team believes the recent inflation acceleration is concentrated in a limited set of price categories and has not yet formed broad-based price pressures. If core inflation does indeed slow, it would provide justification for the Fed to remain patient on policy.

In May of this year, U.S. headline inflation reached 4.2%. Traders on prediction market Kalshi believe the probability of a new high within the year is less than one-third, but the probability of core inflation falling below 2.2% by year-end is only 6%.

Fed Officials Divided, Timing of Rate Hikes in Focus

In September, the Fed unanimously decided to raise rates by 25 basis points, lifting the federal funds rate target range to 3.75%-4.00%. Since then, some officials have leaned toward pausing action in October to assess the impact of previous rate hikes and tighter financial conditions.

Fed Governor Waller said last week that further rate hikes may still be needed in the future, but policy adjustments have timing flexibility, and there is no need to act at two consecutive meetings.

Hammack's stance has been more proactive. She said on Monday that inflationary pressures have extended beyond the energy sector, with some businesses planning to raise product prices faster than the increase in input costs.

She specifically noted that investment demand driven by AI infrastructure buildout is pushing up prices for computers, electronics, and high-tech components, and related cost pressures are beginning to spill over into industries such as aviation, electricity, and construction.

Hammack believes U.S. demand remains strong, with corporate investment and wealth-effect-driven consumption growth keeping inflation at elevated levels. She hopes to bring inflation down by moderately restraining demand while avoiding a significant blow to the job market.

Regarding the late-October policy meeting, Hammack said she remains open-minded. She favors achieving policy goals through smaller, more timely rate adjustments, but has not yet decided on the specific timing of the next rate hike.

Institutions are also divided. Bank of America Securities economist Stephen Juneau believes that if core CPI rises 0.2% month-over-month, it would not be enough to prompt the market to significantly raise expectations for an October rate hike.

CIBC Chief Economist Avery Shenfeld, meanwhile, expects core CPI to rise 0.3% and believes the Fed may raise rates this month. He pointed out that too many inflation components are still growing at rates above 3%.

Citigroup economists believe that if core inflation month-over-month readings remain moderate in the coming months, the Fed may hold rates steady in October, and there may even be reason to extend the pause through December.

Bond Market Watches for Upside Inflation Surprise Risk

After the sharp adjustment following the September rate hike, U.S. Treasury yields have risen to near their highest levels in about 24 years. The recent slowdown in job growth has led investors to lower their expectations for another Fed rate hike in October.

According to CME FedWatch data on Tuesday, the market currently sees only about a 20% probability of a Fed rate hike in October, while the probability of a December hike stands at 88%.

TD Securities U.S. rates strategist Molly Brooks believes the impact of this CPI report on the bond market may be asymmetric. A higher-than-expected inflation reading could prompt investors to reassess the pace of Fed tightening, while an in-line or weaker reading would help sustain the market's view that the Fed will hold off in October.

In addition to Wednesday's CPI, the U.S. will also release the September Producer Price Index (PPI) on Thursday. The two reports will provide more clues for assessing the pass-through of energy costs to prices of other goods and services.

Fed Chairman Warsh is expected to speak on Friday during the IMF annual meetings in Bangkok. As the Fed prepares to enter its quiet period ahead of the late-October policy meeting, the latest inflation data and officials' subsequent policy remarks will be key information for the market in gauging the timing of the next rate hike.