U.S. CPI to Determine Fed’s October Rate Decision

Energy prices have once again driven inflation trends, but underlying pressures have slightly eased, supporting the Fed’s decision to hold steady.

The U.S. Bureau of Labor Statistics will release the September CPI data on October 14 (next Wednesday). According to Wind Trader, Barclays and Morgan Stanley predict that the overall CPI for September will accelerate due to a significant rise in gasoline prices, while the month-over-month increase in core CPI is expected to slightly narrow compared to August, primarily because the upward trend in wireless communication service prices has partially eased. Both institutions forecast the month-over-month increase in core CPI at 0.24%, below the 0.29% recorded in August.

This data will directly influence the Federal Reserve's decision at its October interest rate meeting. Barclays Research believes that although near-term inflation risks remain on the upside, Fed officials are likely to hold rates steady in October, continue monitoring subsequent data, and defer a 25-basis-point rate hike until December.

The Fed's earlier-released September meeting minutes showed that "most" officials expected one more rate hike this year, but signaled no urgency for October. Fed Governor Waller stated that rate hikes do not need to occur at consecutive policy meetings, and officials can flexibly time their decisions based on economic data. The market has now pushed the expected rate hike from October to December. Goldman Sachs believes the probability of a December hike is higher, but the FOMC also sees a substantial likelihood that no further tightening will be necessary.

Barclays forecasts that the overall CPI for September will rise 0.58% month-over-month (seasonally adjusted) and increase year-over-year to 3.7%, up by approximately 0.3 percentage points from August’s 3.4%, though still below the recent peak of 4.2% in May this year. Morgan Stanley’s forecast is slightly higher, with a year-over-year increase of 3.69% and a month-over-month increase of 0.62%.

Energy was the primary driver behind this overall surge in inflation. According to Barclays, the month-over-month increase in the energy component reached a steep 5.05%, with gasoline prices rising 9.23% month-over-month and 34.8% year-over-year; heating oil surged 38.8% year-over-year.

Morgan Stanley noted that the ongoing tension in the Middle East is a key factor driving up oil prices, which will further transmit to airfare and transportation costs. The Barclays research team also previously warned that rising diesel prices are gradually being passed on to U.S. consumers.

While overall inflation has risen, core CPI pressures have slightly eased. Barclays forecasts a 0.24% month-over-month increase in September core CPI, with a year-over-year rate of 2.5%; Morgan Stanley holds the same forecast at 0.24%, both down 5 basis points from August’s 0.29%.

The main driver behind the slowdown in core inflation was the "Education and Communication" component. In August, wireless communication service prices surged abnormally, contributing approximately 0.1 percentage points to core CPI. Barclays expects that, despite Verizon’s latest price hike combined with AT&T’s reduced planned increase, this component will still push inflation upward in September, but to a significantly lesser extent than last month.

Meanwhile, airfare and healthcare prices remain key drivers of core inflation. Morgan Stanley noted that airfares rose 23% year-over-year in August and are forecast to increase 1.8% month-over-month in September; Barclays predicts a 2.6% month-over-month increase in airfares. Morgan Stanley added that jet fuel prices have risen nearly 90% year-over-year, and since fuel accounts for approximately 20% to 30% of airlines’ operating costs, the pass-through of fuel cost increases to ticket prices may be nearly complete. Additionally, after weakening in August, Morgan Stanley forecasts a 0.55% month-over-month rebound in healthcare prices in September.

Regarding core goods, Barclays and Morgan Stanley forecast a month-over-month increase of 0.13% to 0.14%, roughly flat compared to August, with slight strength in both new and used vehicle prices.

Housing components continued their stable trend. Barclays forecasts a 0.24% month-over-month increase in owner’s equivalent rent (OER) and a 0.23% increase in primary residence rents for September; Morgan Stanley forecasts OER and primary residence rents at 0.25% and 0.20%, respectively. Morgan Stanley noted that since May this year, housing inflation has averaged a monthly increase of approximately 0.24%, slightly below the long-term pre-pandemic trend of 0.26%, and expects recent levels to remain near this range.

Auto insurance continues to weigh on core inflation. Morgan Stanley forecasts a 0.20% month-over-month decline in auto insurance premiums for September and expects this negative trend to persist through 2027, primarily due to improved profitability among insurers, prompting them to lower prices to gain market share.

Regarding hotel prices, after two consecutive months of unusually weak performance, there was a strong rebound in August, and Morgan Stanley forecasts a flat month-over-month change (0%) for September.

CPI data also provides guidance for the PCE inflation metric, which is of greater concern to the Federal Reserve. Barclays forecasts September core PCE inflation at 0.22% month-over-month and approximately 3.0% year-over-year; Morgan Stanley’s forecast is slightly higher at 0.23% month-over-month.

Barclays researchers Pooja Sriram, Marc Giannoni, Jonathan Millar, and Colin Johanson noted that there is some uncertainty in the PCE prices for financial services, particularly because the U.S. Bureau of Economic Analysis (BEA) has adopted a new methodology to estimate the prices of portfolio management services; the required nominal spending and labor hour data may not be available in a timely manner, increasing the difficulty of forecasting. The team stated that they will further refine their forecasts after the upcoming CPI and PPI data releases.

From a policy perspective, Barclays maintains its baseline forecast: the Federal Reserve will raise rates by 25 basis points in December. The firm notes that, due to base effects, the medium- to long-term inflation indicators favored by Chair Walsh—such as the 6-month and 12-month measures—are unlikely to improve significantly this year, but the outlook for 2027 will improve markedly.

Recent statements by Federal Reserve officials suggest that uncertainty in the distribution of inflation outcomes could support further tightening from a risk management perspective, but Barclays expects policymakers to hold off in October, awaiting more data for validation.

It is worth noting that Morgan Stanley highlights several key variables to closely monitor in this report: first, Apple’s price increase of 10% to 14% on select older iPhone models ahead of its September 9 launch of new devices; however, since smartphones account for only about 0.2% of the CPI basket and some regions sample bi-monthly, the direct impact is expected to be no more than 1 to 1.4 basis points; second, whether there is still room for further increases in airfare prices; and third, whether housing inflation can maintain its current stable pace.

Article by Zhang Yaqi, Wall Street Journal