September inflation surprise amps up uncertainty on Fed cuts

Underlying US inflation rose more than forecast in September, representing a pause in the recent progress toward moderating price pressures.

The so-called core consumer price index — which excludes food and energy costs — increased 0.3% from August and 3.3% from a year ago, Bureau of Labor Statistics figures showed Thursday. The three-month annualized rate advanced 3.1%, the most since May, according to Bloomberg calculations.

Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure rose 0.2% from the prior month and 2.4% from a year before, still the slowest annual rate since early 2021 and largely due to cheaper energy prices.

The BLS said shelter and food combined accounted for over 75% of the overall monthly advance. Goods prices rose as well after reliably falling over the past year. 

The higher-than-expected inflation figures, along with last week’s blowout US jobs report, will likely amplify the debate whether the Federal Reserve will opt for a small interest-rate cut next month or pause after a large September reduction. Officials penciled in another half-point of cuts by year-end, and many have said they’re watching developments in the labor market.

Stock futures and Treasury yields declined, while the dollar weakened. Traders see higher odds of a 25-basis-point Fed rate cut next month.

The Fed started lowering borrowing costs in September with an outsize 50-basis-point reduction given what had been continued inflation progress as well as a string of weak labor-market data. Minutes of the meeting released Wednesday indicate there was a robust debate over the size of the cut, and officials who have spoken since then say they favor a gradual approach.

Category Breakdown

New and used car prices were up as well as apparel and furniture, contributing to only the second increase in so-called core goods prices since June 2023. Within services, car insurance, medical care and airfares rose notably. Admission to sporting events climbed a record 10.9%, in part reflecting the start of football season.

Shelter prices, the largest category within services, increased 0.2%, a big step down from August’s 0.5% advance. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose 0.3%, also a deceleration from the prior month. Hotel prices declined, widely defying expectations for a hefty increase.

Excluding housing and energy, service prices rose 0.4%, the most since April, according to Bloomberg calculations. It also represented the third straight acceleration, the longest streak since early 2023. While central bankers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI does, partly why it’s trending closer to the Fed’s 2% target.

The PCE measure, which will be released later this month, draws from the CPI as well as certain categories within the producer price index, which is due Friday. Several of the CPI items that registered robust gains, like car insurance and airfares, won’t feed through to the PCE, which should support another muted advance when the data are released later this month.

Separate data Thursday showed that applications for unemployment benefits rose last week to the highest in over a year, reflecting large increases in Michigan, as well as states affected by Hurricane Helene.