Sticky inflation, but an October hike remains unlikely

The September CPI report was firm but provided some warning signals. Headline CPI rose 0.6% during the month, a strong reading that was largely expected given higher energy prices. Core inflation, however, came in slightly above expectations, with annual and monthly increases of 2.6% and 0.3%, respectively. 

Together, these figures reveal that underlying price pressures remain stubbornly sticky. While today’s report is unlikely to justify a rate hike in October, persistent inflation and continued upside risks suggest the Fed’s work is not yet finished. Additional hikes later this year and into 2027 are likely.

Report details

• Headline inflation rose 0.6% in September, in line with expectations given higher energy prices. The annual rate, however, increased to 3.7%, reversing some of the progress made earlier in the summer when CPI eased from above 4%. While the surge in gasoline prices accounted for more than 50% of the monthly increase, underlying price pressures were broad-based, and half of the CPI basket is still running at an annualised pace above 3%. This suggests inflation is not being driven solely by energy-related segments, a concerning development as policymakers monitor signs of broader spill over from geopolitical disruptions.
• Crude oil prices fluctuated around $100 per barrel throughout September, nearly 50% above the lows reached during the summer ceasefire and more than 75% higher than at the start of the year. While recent reports suggest crude oil flows through the Strait of Hormuz have recovered to near pre-conflict levels, higher transit costs are keeping prices elevated, while diesel shipments remain constrained due to refinery damage in the region, a disruption that is expected to take longer to resolve. Consequently, energy price pressures are likely to persist, raising the risk of broader pass-through to consumer prices.
• Food inflation remained relatively contained in September, with food away from home prices rising modestly and food at home prices declining slightly. Notably, three of the six major grocery categories posted monthly price declines, providing some relief for consumers facing ongoing affordability pressures. That said, ongoing disruptions to fertiliser trade flows through the Strait of Hormuz persist, while El Niño-related weather risks may threaten agricultural production. Together, these factors continue to pose upside risks to global food prices.
• Core inflation, which excludes food and energy, was once again firmer than expected. The index rose 0.3% in September, above the threshold broadly perceived as progress toward price stability, while the annual rate edged higher to 2.6% from 2.4%. Shelter inflation was a notable contributor, although some of the increase reflected higher hotel prices, which tend to be volatile. Owners’ equivalent rent, however, edged higher, with the annual rate reaccelerating after several months of moderation. Nevertheless, it remains well below pandemic-era levels and appears to be stabilising close to its pre-pandemic trend. Beyond shelter, price pressures were evident across broader categories, including car and truck rentals, education, recreation, and tech-related goods. While declines in medical commodities and household furnishings provided some relief, it was not enough to temper concerns that broad and sticky inflationary pressures persist.
• The Fed’s preferred supercore inflation measure rose 0.4%, pushing the annual rate up to 3.1% from 3.0%. The increase reinforces that price pressures could further erode household purchasing power if sustained.

Policy outlook

Two consecutive firm inflation reports have strengthened the case for additional Fed tightening. While the 0.6% increase in headline CPI was largely expected given higher energy prices and persistent geopolitical tensions in the Middle East, the renewed acceleration in core inflation and broader price pressures are likely to attract greater attention.

The latest data are unlikely to be sufficient to trigger a rate hike in October, particularly just days before the mid-term elections. Even so, they underscore that inflation remains too persistent for the Fed to declare victory. We continue to expect further tightening in December and early 2027 as policymakers seek greater confidence that inflation is moving sustainably back towards target.