US core CPI reopens the October debate, but December remains our call
US inflation surprised to the upside in September, and did so in the part of the basket the Fed cares about most. Headline CPI rose 0.6% MoM as expected, but the annual rate climbed to 3.7% rather than the 3.6% consensus.
More importantly, core rose 0.3% MoM for a second consecutive month against expectations for a moderation to 0.2%, lifting annual core inflation to 2.6% YoY. That puts an October rate rise back in play, with the dollar rallying in tandem.
Granted, September developments remain largely an energy story. With Hormuz flows still impaired, and product markets seeing stresses build, gasoline averaged a record $4.33 a gallon last month.
But the question we posed after the August data was whether the shock was broadening beyond fuel. Looking back, August’s 0.3% single-month core print could be partly explained away by a methodology-driven jump in telephone services. A September repeat makes that far less convincing, and points to pass-through into services running ahead of what Fed leadership had assumed. Indeed, supercore prices grew 0.43% in September after 0.51% in August, well above both a target-consistent pace and July's 0.19% increase. While the new Warsh-led FOMC has focused on other measures of underlying price pressure, we suspect this will catch the attention of many committee members.
Certainly, this has been noted by traders, who have accelerated Fed rate hike bets post-release. October tightening odds, which stood at 20% pre-announcement, are now priced as close to a coin toss. For now, we retain our call for a hold on October 28th, followed by a 25bp hike in December.
After all, Williams, Waller and Bowman, amongst others, spent the past fortnight steering markets away from a back-to-back move; September’s 29k payrolls print and 4.2% unemployment rate gave them cover to do so, and the decision falls six days before the midterms. But that conversation could now be restarted, and we will be watching upcoming Fedspeak closely regarding not only this month’s rate decision, but also the back end of the debate. Williams’ suggestion yesterday that no further tightening would be needed in 2027 now looks harder to sustain.
For FX, this reinforces the asymmetry we highlighted in the week ahead: with Middle East risks unresolved, and rising fiscal concerns outside the US, dollar dips should stay shallow.
Indeed, EURUSD has already slipped close to a percent post-release, with GBPUSD not far behind. Tomorrow’s PPI and Warsh’s appearance in Bangkok on Friday are the next tests, but with today’s data in hand, we see little reason to fade dollar strength until much closer to the Fed's October 28th rate announcement.