Consumer prices climbed 0.6% in September and 3.7% from a year earlier, with gasoline accounting for more than half of the monthly gain. Core inflation rose to 2.6% as rent held steady while hotel rates, airfares and used cars moved higher.
Economists were ready for a hot headline number in September. A second hot core reading was not in their forecasts.
The consumer price index rose 0.6% on a seasonally adjusted basis, in line with expectations and up from 0.4% in August, the Bureau of Labor Statistics said Wednesday. Over 12 months prices were up 3.7%, a tenth above the 3.6% forecast and up from 3.4%. Prices excluding food and energy rose 0.3% for a second straight month, against a 0.2% consensus, which lifted the annual core rate to 2.6% from 2.4%.
Fuel
Gasoline supplied most of the headline. Its index jumped 9.1% on the month, enough to account for over half of the all-items increase, and stands 34.2% above last September. Fuel oil rose 15.3%. The energy index as a whole gained 5.2% and is up 20.4% on the year. Food prices were unchanged, with grocery prices down 0.1% and restaurant prices up 0.2%.
Paychecks did not keep up. Average hourly earnings rose 0.1% in September, so after adjusting for inflation they fell 0.5%, the bureau said in a companion release. Real hourly pay is down 0.7% from a year earlier.
Inside the core
For the Federal Reserve, the issue is whether the energy shock is moving into prices that have nothing to do with the pump. The September detail contains evidence on both sides of that question.
Both halves of the core sped up. Goods excluding food and energy rose 0.3%, after 0.1% in August. Services excluding energy rose 0.4%, after 0.3%. Used cars and trucks gained 0.7%, recreation 0.5% after no change in August, education 0.6% and apparel 0.3%. Airline fares rose 1.2% on the month and are up 22.4% over the year, a category the energy shock may reach through jet fuel.
Housing was steadier. Rent of primary residences rose 0.2%, matching August, and owners' equivalent rent rose 0.3%. The shelter index climbed 0.4%, but hotel and motel prices, which the bureau tracks as lodging away from home, jumped 2.0% after a 2.4% gain the month before. Those two months show how much more that series moves than rent does.
Several categories fell. Prescription drug prices dropped 1.2% and medical care commodities 0.7%. Communication slipped 0.2% after rising 2.3% in August.
On a 12-month basis the split inside the core is wide. Core goods prices are up 0.7%. Core services are up 3.1% and shelter 3.2%.
The forecasts
Forecasters had expected a cooler month. Economists at UBS and Natixis both projected a core increase of 0.19%, and Wells Fargo 0.20%. "An upside surprise, particularly in the core, could revive the October debate, both moving market pricing and influencing the decision itself," UBS economists wrote before the release. Natixis economists Christopher Hodge and Selin Aker had argued in their preview that "supply shocks are not bleeding through more broadly to core prices."
Futures traders moved quickly. The probability of a rate increase at the Oct. 27 and 28 meeting rose above 40% after the report, from about 22% beforehand, according to CME FedWatch data. The Fed raised rates by a quarter point on Sept. 16, its first increase since July 2023, taking its target range to 3.75% to 4.00%.
Market implications
One reading is that energy is spreading into the core. Core prices have now risen 0.3% in each of the past two months, goods and services both accelerated in September, and gains reached apparel, recreation and education as well as fuel-linked airfares.
A second reading is that the core increase is concentrated in noisy categories. Rent rose at the same pace as in August, the shelter increase came alongside another large swing in hotel prices, drug and communication prices fell, and core goods are up less than 1% from a year ago. Before the report, Natixis economists described the core trend as "gradually normalizing."
The measures that separate those readings strip out the largest moves on either side. The Cleveland Fed's median and trimmed-mean CPI, published later on Wednesday, will show whether the typical price rose faster in September or whether a few outliers lifted the average.
What to watch
Producer prices and retail sales on Thursday, Fed Chairman Kevin Warsh's remarks at the IMF annual meetings on Friday, the Fed's Oct. 28 decision and October consumer prices on Nov. 10, which will show whether a 0.3% core pace becomes three months in a row.