A record jump in gasoline prices is expected to lift headline inflation when September’s Consumer Price Index lands Wednesday, but it’s the softer core reading that could decide whether the Federal Reserve hikes again later this month.
CPI is an important measure for inflation and this week's report is a major inflation print before the Fed’s Oct. 27-28 meeting. That read arrives just weeks after the central bank raised rates for the first time since July 2023. The CPI numbers may give advisors fresh clues on the rate environment their clients will face heading into 2027.
At its most recent meeting, the Federal Reserve raised interest rates in a unanimous 12-0 decision. The move also saw the central bank defy months of pressure from President Donald Trump to make a cut.
Minutes from the Federal Open Market Committee’s September meeting released last week revealed that another rate hike is likely before the end of 2026. However, the recent September jobs report missed forecasts, which Fed watchers said lowers the chances of a hawkish decision at its upcoming October meeting.
Economists surveyed by Dow Jones Newswires and The Wall Street Journal are looking for CPI to increase 0.6% month-over-month in September after rising 0.4% in August. Core CPI, or the index for all items less food and energy, is expected to rise 0.2% after climbing 0.3% in August.
Over the last 12 months, CPI is expected to increase 3.6% in September, up from a year-over-year increase of 3.4% in August.
Wednesday’s CPI print will be a tale of two inflation stories, according to Gene Goldman, chief investment officer at broker-dealer and RIA network Cetera. “Energy is driving the headline,” he said. “Gasoline just posted a record September, up almost 10% from August, so I expect headline CPI to jump, with the annual rate moving up toward the mid 3% range.”
However, Goldman sees core CPI as the more important number, and he expects it to be softer.
Core CPI is expected to rise 2.5% year-over-year in September, compared with a 12-month increase of 2.4% in August, according to economists surveyed by Dow Jones Newswires and The Wall Street Journal.
“This is the last major inflation report before the Fed meets October 27 and 28, and it comes right after their September hike,” said Goldman. “The Fed’s own projections show a committee that is far from unified on where rates go from here, particularly in 2027.”
“When Fed voters are that split, none are using a shared script, so each data point carries more weight,” he added. “A soft core-inflation print gives the patient camp a reason to hold in October. A hot one gives the hawks their argument.”
The CME’s FedWatch tool puts the probability of a hike to between 4% and 4.25% at 23.8% for October’s Fed meeting, with the likelihood rising further to 69.2% for December’s meeting. The tool, which updates in real time, gives a 20.6% likelihood of a December raise to between 4.25% and 4.5%.
But Bob Edwards, chief investment officer at Edwards Asset Management, thinks that CPI may come in cooler than expected this week, potentially giving the Fed room to hold off on another hike. “I'm leaning toward a September CPI report that comes in somewhat softer than consensus expectations, although elevated energy prices remain a concern,” he said, in a note. “I believe weakening employment growth suggests underlying inflation pressures could begin moderating, potentially giving the Fed room to retreat from its increasingly hawkish stance.”
Still, inflation looms large over the Federal Reserve and its forthcoming rate decision. “Wednesday’s CPI is likely to show elevated inflation thanks to rising energy prices, and while there will be much scrutiny on the month-over-month numbers, the bottom line is that inflation is still well above the Fed’s 2% target and that is a problem for the central bank,” added Clark Bellin, president and chief investment officer, Bellwether Wealth, in a note.
Advisors will get yet another important measure for inflation this week, with the release of the latest Producer Price Index (PPI) data on Thursday.
“For the Fed, the mediocre September jobs report isn’t bad enough to shift the focus away from inflation,” said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, in a note. “Their next decision in late October is live, in our view, and will probably be swayed by the September CPI and PPI reports, geopolitical developments, and prices at the pump between now and then.”
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