Source: Jin10 Data
On Wednesday at 20:30, the U.S. Bureau of Labor Statistics will release the September Consumer Price Index (CPI). Markets expect rising gasoline prices to drive a noticeable acceleration in overall inflation, while core inflation, excluding food and energy, may show a slower monthly increase. The divergence between these two metrics will be a key indicator for assessing U.S. price pressures and the Fed’s next policy move.
Before the data release, Federal Reserve officials remain divided on the necessity and timing of further rate hikes. On Monday, Cleveland Fed President Harker stated that U.S. inflationary pressures are spreading to more sectors of the economy, and monetary policy needs to be tightened as gradually and frequently as possible; however, she remains open to whether a rate hike should occur at the end of October.
Overall CPI may record its largest increase in five months, while core inflation shows signs of cooling.
According to a survey of economists by foreign media, the U.S. overall CPI for September is expected to rise 0.6% month-over-month, higher than August’s 0.4%, and is projected to register the largest monthly increase in five months. The year-over-year increase is forecast to rise from 3.4% to 3.6%. For core CPI, the month-over-month increase is expected to be 0.2%, and the year-over-year increase is projected to be 2.5%.
Energy prices have been the main driver behind the rise in overall inflation. Due to the ongoing conflict in the Middle East, international oil prices have remained high, causing U.S. retail gasoline prices to reach their highest level in four months.
Goldman Sachs expects energy prices to rise approximately 5% month-over-month in September, and food prices to increase by 0.2%. Rising jet fuel costs may also push up airfare, with Goldman Sachs forecasting a roughly 3% increase in ticket prices for the month.
Core inflation may remain relatively moderate. Goldman Sachs expects increases in used car, new car, and auto insurance prices, but housing inflation continues to slow. Owner’s equivalent rent and actual rent are forecast to rise 0.20% and 0.17% month-over-month, respectively.
Deutsche Bank economists expect overall core commodity prices to remain flat, with declines in used car prices and some medical goods offsetting increases in leisure and information technology goods.
The Bloomberg Economics team believes that recent inflationary pressures have been concentrated in certain price sectors and have not yet led to broad-based price increases. If core inflation does indeed slow, it will provide justification for the Fed to maintain policy patience.
In May of this year, the overall U.S. inflation rate reached 4.2%. Traders on the 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 are divided on their views, with the timing of rate hikes becoming the focal point.
The Federal Reserve unanimously decided in September to raise interest rates by 25 basis points, increasing the target range for the federal funds rate to 3.75%-4.00%. Following this, some officials favored pausing action in October to assess the impact of previous rate hikes and tighter financial conditions.
Last week, Federal Reserve Governor Waller said that further rate hikes may still be needed in the future, but policy adjustments offer flexibility over time, and there is no need to act at two consecutive meetings.
Hamark's attitude, however, is more positive. She said on Monday that inflationary pressures have extended beyond the energy sector, with some companies planning to raise product prices at a rate higher than the increase in their input costs.
She specifically noted that investment demand driven by artificial intelligence infrastructure development is pushing up prices for computers, electronics, and high-tech components, and the associated cost pressures are now beginning to affect industries such as aviation, power, and construction.
Hamark believes that U.S. demand remains strong, with corporate investment and wealth effect-driven consumption growth keeping inflation elevated. She aims to moderately dampen demand to bring inflation down while avoiding significant impacts on the labor market.
Regarding the interest rate meeting at the end of October, Hamrick said she remains open-minded. She favors achieving policy goals through smaller, more timely interest rate adjustments, but has not yet decided on the timing of the next rate hike.
There are also disagreements among institutions. Stephen Juneau, economist at Bank of America Securities, believes that a 0.2% month-over-month increase in core CPI would not be sufficient to significantly push up market expectations for an October rate hike.
Avery Shenfeld, Chief Economist at the Canadian Imperial Bank of Commerce, expects core CPI to rise by 0.3% and believes the Fed may raise rates this month. He noted that too many inflation components are still growing above 3%.
Citi economists believe that if core inflation remains modest on a monthly basis over the coming months, the Fed may hold rates steady in October, and even have reason to extend the pause on rate hikes through December.
The bond market is watching for the risk of an unexpected rise in inflation.
After a significant adjustment following the September rate hike, U.S. Treasury yields have risen to levels near their highest in approximately 24 years. Recent slowing job growth has led investors to lower expectations for another Fed rate hike in October.
According to the CME FedWatch tool data on Tuesday, the market currently estimates only about a 20% probability of a Fed rate hike in October, with an 88% probability of a hike in December.
Molly Brooks, U.S. interest rate strategist at TD Securities, believes the impact of this CPI data on the bond market may be asymmetric. Higher-than-expected inflation data could prompt investors to reassess the pace of the Fed’s policy tightening, while in-line or weaker data may support market expectations of a pause in rate hikes in October.
In addition to Wednesday’s CPI, the U.S. will release the September Producer Price Index (PPI) on Thursday. Both reports will provide further insight into how energy costs are being passed through to other goods and services prices.
Fed Chair Powell is expected to speak during the IMF annual meetings in Bangkok on Friday. As the Fed approaches its silent period ahead of the October policy meeting, the latest inflation data and subsequent comments from officials will be key indicators for markets in assessing the timing of the next rate hike.