Less than expected, but still warm.
The September CPI rose by 0.3 percent in September, a bit less than the market's expectations of 0.4 percent. The core CPI (removing the volatile food and energy components) also climbed slightly less than expected, up by 0.2 percent. These monthly increases pushed the 12-month trend rates up to 3.0 percent for both measures.
Not as hot as feared, but the trend rates both have a "3 handle" and that can't be viewed as favorable. It is a full percentage point above the Federal Reserve's long-term goal of 2.0 percent and moving in the wrong direction. This is the only official inflation data that will be released until the federal government shutdown is over -- and it's not clear when that will be.
The PCE price indices, which are broader than the CPI and preferred by the Fed as inflation measures relative to the CPI, will not be released until the shutdown ends. But several of the regional Federal Reserve banks will release their computations of inflation central tendency measures based on the details in today's CPI report later today. Most economists view these inflation measures as superior to either the CPI or PCE inflation measures -- and they have been running a bit hotter.
The FOMC meets this week with much less data on the economy and inflation than it would normally have. Despite the CPI trend rates running at 3.0 percent, the CME's FedWatch tool shows that markets have a 99 percent probability of a 25-basis point cut in the federal funds rate at that time. There is a similar expectation for another Fed rate cut at the December FOMC meeting -- with even more rate cuts in 2026.
Markets expect the Fed to ease despite hotter than goal inflation, presumably because the job market has cooled and maximum employment is the other part of the Fed's mandate. If the economy is cooling dangerously, then early Fed easing is appropriate. But if supply-side shocks (mostly from tariffs) are pushing inflation higher, then significant Fed easing runs the risk of monetizing those shocks and keeping inflation elevated (as we saw in the 1970s).
This is an especially fraught time not to have a steady stream of economic data to help the Fed make correct policy decisions. But we are likely to stay in this data fog for a while.
David W. Berson, Ph.D., CBE
Chief Economist
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