September's 3.7 Per Cent Is a Petrol Number. The 0.3 Underneath It Is the Fed's Problem
US consumer prices rose 0.6 per cent in September and 3.7 per cent over the year, with gasoline supplying more than half of the monthly rise. Core inflation held at 0.3 per cent for a second month, and the odds of a 28 October rate rise more than doubled by lunchtime.
The Consumer Price Index rose 0.6 per cent in September on a seasonally adjusted basis, after 0.4 per cent in August, and 3.7 per cent over the 12 months, up from 3.4 per cent, the Bureau of Labor Statistics said on Wednesday. Gasoline rose 9.1 per cent on the month and 34.2 per cent on the year and accounted for over half of the monthly all items increase. Fuel oil is up 74.2 per cent on the year and the energy index as a whole 20.4 per cent. Food was flat on the month, with grocery prices down 0.1 per cent and beef down 1 per cent.
The headline was expected. Economists had pencilled in 3.6 per cent and the monthly 0.6 per cent matched consensus, with the Strait of Hormuz closure still working through pump prices. The number the Federal Reserve will read twice is the core index, which excludes food and energy. It rose 0.3 per cent for a second month when forecasters wanted 0.2, and 2.6 per cent over the year against 2.4 per cent in August. TD Economics puts the three-month annualised core rate at 3.4 per cent. Shelter rose 0.4 per cent, airline fares 1.2 per cent, used cars 0.7 per cent and recreation 0.5 per cent. The list of things going up is getting longer than fuel.
The next CPI release is on 10 November, two weeks after the Fed decides.
From the analysisMarkets repriced within the hour. Fed funds futures tracked by CME's FedWatch put the chance of a quarter-point rise at the 27 to 28 October meeting at about 54 per cent by midday, from 22 per cent on Tuesday, and the probability of at least one rise before year end above 95 per cent, CNBC reported. The Fed lifted its target range to 3.75 to 4 per cent on 16 September, its first increase since 2023, and the median projection in its September dot plot already assumed one more move this year, with 16 of 18 participants expecting at least that.
The Fed's awkwardness is that its own framework says to look through an energy shock, and its own forecasts say the shock is leaking. Core PCE, the measure it targets, was projected at 3.4 per cent for the end of this year in September, against a 2 per cent goal. A supply-driven oil spike is the textbook case for patience. Two consecutive 0.3 per cent core prints with airline fares, used cars and lodging all moving is the textbook case for worrying that patience has run out. Chair Kevin Warsh raised rates in September on the argument that it would support a "timelier return" to target. September's data have made that argument for him again.
We think the Fed will move on 28 October and that it will be the wrong tool doing the only job available to it. A 25 basis point rise does nothing to the price of a barrel of Brent or the throughput of the Strait of Hormuz. What it can do is stop a 20 per cent energy shock becoming a 3.5 per cent wage and rent story, and the core data say that is now the live risk. The faster relief is on the supply side: the Treasury has already loosened Russian diesel sanctions for exactly that reason, as Sox reported on 10 October, and Washington has waivers, reserve releases and permitting decisions that would reach the pump sooner than any rate decision reaches rents.
There is a political calendar underneath the economic one. The Social Security cost of living adjustment for 2027 is set from today's CPI-W figures, and President Trump has said repeatedly that the United States should have the lowest interest rates in the world. The next CPI release is on 10 November, two weeks after the Fed decides. Until then the question is whether October's core print comes in at 0.2, which would let the committee describe September as noise, or at 0.3 again, which would make a December move the second of two rather than the first of one.
The Semaform
US consumer prices rose 0.6 per cent in September and 3.7 per cent on the year, with core inflation at 0.3 per cent on the month and 2.6 per cent on the year, both above forecasts, lifting market odds of a Fed rate rise on 28 October to about 54 per cent.
The headline is an energy shock the Fed should look through, but two straight 0.3 per cent core prints suggest it is spreading. A rate rise is likely and will not touch the oil price; the faster relief is supply-side.
Some economists argue the Fed should hold in October because gasoline explains most of the rise and food and grocery prices are flat; others, including Oxford Economics, now forecast a hike this month on the strength of the core number.
Sources
- US Bureau of Labor Statistics, Consumer Price Index Summary, September 2026, 14 October 2026
- Federal Reserve, FOMC statement, 16 September 2026
- Federal Reserve, Summary of Economic Projections, 16 September 2026
- Reuters, Hot September CPI sends rate-hike bets soaring, 14 October 2026
- CNBC, Fed may now have to hike twice or increase by a half point in December, traders bet, 14 October 2026
- TD Economics, US Consumer Price Index September 2026 commentary
- Sox News, Washington Loosens Russia Sanctions for a Diesel Promise, 10 October 2026
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