Core inflation comes in hot again, increasing the likelihood of an October Fed rate hike

Core CPI again came in hotter than expected on Wednesday, putting more pressure on the Federal Reserve to make another rate hike, just weeks after its first increase in over three years.

The Consumer Price Index is an important measure for inflation, and the latest numbers will be closely watched by advisors and their clients for clues as to the Fed’s next move. Last month the central bank raised rates for the first time since July 2023. Minutes from the Federal Open Market Committee’s September meeting released last week also revealed that another rate hike is likely before the end of 2026. 

Core CPI, or the index for all items less food and energy, 0.3% in September, holding steady after rising 0.3% in August, according to the U.S. Bureau of Labor Statistics. However, the core number came in higher than expected - economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for a 0.2% increase.

On a year-over-year basis, core CPI rose 2.6%, just above economists’ forecast of 2.5%, after rising 2.4% in August.

“Today’s CPI report came in hot, with annual headline inflation reaching its highest level since May,” said Bret Kenwell, U.S. investment analyst at etoro, in a note. “The knee-jerk reaction may be for traders to reassess the odds of a Fed rate hike later this month, though those odds had remained fairly low following recent cooler-than-expected PCE data and a disappointing jobs report. If this report pushes those odds closer to 50/50, the Fed’s new, less communicative posture could add to volatility around the rate decision later this month.”

The CME’s FedWatch tool puts the probability of a hike to between 4% and 4.25% at 51.5% for October’s Fed meeting, up from 23.8% on Tuesday. For December’s Fed meeting, the likelihood of a hike to between 4% and 4.25% is 50.7%. The tool, which updates in real time, gives a 46.9% likelihood of a December raise to between 4.25% and 4.5%.

However, Jeff Schulze, head investment strategist at Franklin Templeton Institute, thinks that a rate hike may not be imminent, despite the hotter-than-expected CPI number. “Today’s warmer core CPI release bolsters the case for additional rate hikes, but recent dovish Fed-speak from NY President Williams and Governor Jefferson suggests that the bar is high for an immediate hike,” he said, in a note. “In our view, September’s print was likely not sufficient for the Fed to execute back-to-back increases at the October FOMC meeting.”

Data released Wednesday also show that September’s CPI increased 3.7% over the last 12 months, just above economists’ expectations of a 3.6% increase and after rising 3.4% in August.

On a seasonally adjusted basis, CPI increased 0.6% in September, in line with economists’ forecast, after rising 0.4% in August.

Jeffrey Roach, chief economist for LPL Financial, thinks that the CPI data provides broad context on the inflationary environment faced by advisors and their clients. Certainly, the jump in gasoline prices is reflected in the CPI numbers, with the index for gasoline rising 9.1% in September, accounting for over half of the monthly all items increase. But, as the Middle East conflict continues, inflation pressures are becoming more widespread across other categories, according to Roach.

“Inflation pressures are broadening beyond energy, suggesting the last mile back to target could remain bumpy and keep interest rates elevated,” he said, in a note. “The latest report complicates the Fed’s decision this month, as the road back to price stability is looking increasingly difficult to navigate.”