An Inflation Slowdown Might Not Spark a Fed Pivot. Today’s Report Should Tell.

On a month-over-month basis, economists forecast headline inflation rose 0.3% in September, down from a 0.6% rise the month before.

Core CPI, which excludes the volatile food and energy indexes and is considered a better gauge of underlying price growth, is expected to have more or less held steady in September. Economists forecast core inflation to have climbed 0.3% in September, matching August’s climb, and to slow to a 4.1% annual pace, down from 4.3%. That would bring the annual pace of core inflation to its slowest pace in two years.

On its surface, a September inflation report in line with expectations would look like welcome news for the Fed, with the annual pace of both core and headline inflation decelerating from the previous month. But the underlying details could present something of a mixed picture, given the risk that a cooling headline inflation number could end up masking worrisome heat below the surface. 

“As with most macro data reports these days, nuance is going to matter,” wrote Andrew Patterson, senior economist with Vanguard.

Housing is one category expected to offer little relief in September.
Bank of America
economists forecast rent price growth ticked up from 0.4% to 0.5%, while the owners’ equivalent measure held steady at a strong 0.4% for the month.

Core services excluding housing—a measure the central bank has been especially focused on in recent months—could remain similarly strong, with
Citi
economists forecasting a 0.5% climb during the month of September. The U.S. economy, they wrote, is “exiting the inflation soft-patch.”

“The reading should serve as a reminder to markets and Fed officials that too-high inflation has not been vanquished,” Citi economists Veronica Clark and Andrew Hollenhorst wrote.

Economists also see a greater risk that price growth for September could come in above forecasts, rather than below, particularly if either airfares decelerate less than anticipated or hotel prices fail to decline as expected. 

They warn, too, that the path forward for further inflation declines after September is only growing more difficult. Used car prices may be finished declining, and other goods prices are more or less holding steady. 

Health insurance costs are also all but guaranteed to begin rising in October’s data due to a looming recalibration in sector prices. That adjustment will erase the impact of a Covid-era anomaly that had been making health-insurance inflation appear artificially low and push overall price growth up.

All of which means the Fed will be watching the details of the inflation report carefully as it gauges whether to raise interest rates again at either of the two policy meetings left this year.

Minutes of the Fed’s Sept. 19-20 meeting, which were released on Wednesday, showed that a majority of bank officials continued to believe one more quarter-point increase in the federal-funds rate would be appropriate. The September jobs report, released on Friday, also showed the labor market created a stunning 336,000 jobs last month, more than double what economists had forecast. That suggests the economy would be able to withstand further tightening.

But rising bond yields over the past few weeks have begun to shift the outlook somewhat. Multiple Fed officials have noted in recent weeks that the bond market developments are doing some of the bank’s job of tightening financial conditions. And that could preclude the need for another rate hike.

Against that backdrop, an inflation print in line with expectations, or below, could be the push the Fed needs to hold rates steady when officials next meet Oct. 31 to Nov. 1.

Write to Megan Cassella at [email protected]