The market remains highly vigilant toward the U.S. CPI data. Although several Fed officials have consistently cooled expectations for an October rate hike, any unexpected data could trigger sharp market movements...
At 8:30 PM Beijing time on Wednesday evening, the U.S. will release the September Consumer Price Index (CPI). Markets expect a significant rise in energy prices to drive a notable acceleration in overall inflation, but core price pressures, excluding food and energy, may remain relatively mild, making the Fed’s next policy decision more complex.
The market generally expects the U.S. September CPI to rise 0.6% month-over-month, significantly higher than August’s 0.4%; the year-over-year growth rate is projected to increase from 3.4% to 3.6%. Core CPI is expected to rise 0.2% month-over-month, below August’s 0.3%, with the year-over-year growth rate slightly increasing from 2.4% to 2.5%.
Oil prices became the largest variable in September inflation.
Energy prices in September were the most closely watched component of this CPI. Driven by the Middle East conflict, transportation risks in the Strait of Hormuz, and tight global refined oil supplies, Brent crude rose over 14% in September and approximately 42% for the entire third quarter. U.S. gasoline prices neared $4.50 per gallon by the end of September, reaching a multi-month high.
RSM Chief Economist Joe Brusuelas warned that there is a significant upside risk to the September CPI, as such rapid changes in energy prices can cause economists' forecasting models to underestimate the actual increase.
Energy shocks are not necessarily limited to gasoline projects. Robert Sockin, Chief U.S. Economist at PGIM, noted that if high oil prices persist, costs for transportation, aviation, food, and other goods could gradually be affected. New York Fed President Williams also stated this week that energy prices have already begun to transmit to core items such as airline tickets.
However, there has not yet been a broad-based price acceleration similar to that seen in 2022. Bloomberg economists believe that the current upward pressure on inflation is concentrated in a few "hot spots" rather than spreading widely, which is why the Fed still has time to observe.
Core CPI may be moderate; the key is whether energy costs spread to other categories.
Compared to the overall CPI, core CPI data may send a relatively moderate signal to the market. Although the market-predicted annual growth rate of 2.5% remains well above the Federal Reserve’s 2% long-term inflation target, it has declined significantly from the peaks seen in recent years.
According to official data from August, the U.S. overall CPI rose 0.4% month-over-month and 3.4% year-over-year, while core CPI increased 0.3% month-over-month and 2.4% year-over-year.
Therefore, what this data truly needs to determine is not just the overall year-over-year figure of 3.6%, but whether energy prices are beginning to broadly influence core goods and services prices.
Williams noted that the price impacts from tariffs on imported goods have largely been transmitted as previously expected; more attention in the near term should be paid to energy and AI investment demand. Demand for data centers, chips, and related construction has pushed up costs for certain goods and construction labor, but these pressures remain concentrated in specific sectors.
If the month-over-month growth rate of September core CPI significantly exceeds the market expectation of 0.2%, the market may reassess the risk that energy shocks are spreading to a broader range of prices.
An October rate hike is not the base case, but a strong CPI could alter market pricing.
The Federal Reserve raised interest rates by 25 basis points in September, increasing the target range for the federal funds rate to 3.75%–4.00%, marking the central bank's first rate hike in three years.
The market still tends to believe that the Federal Reserve will hold rates steady at its meeting on October 27–28. Traders are pricing in a 77% probability of holding rates unchanged in October, implying a roughly 22% chance of a rate hike.
New York Fed President Williams believes another rate hike this year could be appropriate, but did not convey urgency to act immediately in October. Boston Fed President Collins also thinks further policy tightening may be needed before the end of the year.
Therefore, the expected figures of "overall 0.6%, core 0.2%" may reinforce the Fed’s rationale to continue monitoring: energy prices are driving inflation higher, but underlying price pressures have not yet significantly worsened.
The 10-year U.S. Treasury yield remains above 5%, indicating a significant tightening of financial conditions. Whether the September CPI data confirms that inflation increases are still primarily confined to energy will directly influence market expectations regarding the Fed’s decision to hold rates steady in October and whether it will raise rates again in December.