The "New Federal Reserve News Agency" pointed out that unlike the price increases of some items in the August inflation data, the unexpected performance of the core CPI in September is more widespread, and the data at least strengthens the rationale for a rate hike in December.

Written by: Li Dan, Wall Street Insight

The US September CPI exceeded expectations across the board, with price pressures spreading from energy to core goods and services, prompting the market to increase short-term bets on a rate hike by the Federal Reserve in October. Whether inflation can continue to cool down and whether tighter monetary policy is needed more quickly have become the focal points for investors going forward.

Data released on Wednesday, the 14th Eastern Time, showed that the US September CPI rose 0.6% month-on-month and 3.7% year-on-year, both higher than economists' expectations; the core CPI, excluding food and energy, rose 0.3% month-on-month and 2.6% year-on-year, also exceeding expectations. After the report was released, bets on a rate hike by the Federal Reserve in October briefly rose to about 50%, US Treasury yields rose, and the US stock market came under pressure. As the trading period progressed, the probability of a rate hike then fell back to about 40%, indicating that investors are still weighing inflation risks against whether the Fed will respond to single-month data.

Journalist Nick Timiraos, known as the "New Federal Reserve News Agency," pointed out that unlike the strong individual factors in some price increases in the August inflation data, the unexpected performance of the core CPI in September is more widespread: core goods prices rose about 0.25% month-on-month, marking the largest increase in a year; housing prices rose 0.39%; and core service prices excluding housing rose 0.42%, with the annualized growth rate over three months soaring from 1% in July to 4.6% in September. From these figures he listed, inflation pressure is no longer just a short-term impact from rising energy prices.

Timiraos believes that the latest inflation report raises the importance of Federal Reserve Chairman Waller's public speech on Thursday evening Eastern Time, which is Friday morning Beijing time. The signals previously received from Federal Reserve meeting minutes and speeches by some officials indicated that the threshold for consecutive rate hikes in two meetings might be higher than previously expected; but after core inflation broadly strengthened, whether the Fed is still willing to wait for more data becomes a new policy suspense.

Media reports pointed out that after the CPI report was released, economists' concerns about an "inflation spiral" intensified, and pricing pressures could also become a key issue before the midterm elections in November. Continuing rises in energy costs, rebounds in core service prices, and erosion of real wage purchasing power put the Federal Reserve in a more difficult position: if inflation pressure continues to spread, a tighter policy may be needed for a longer time; if rate hikes further suppress consumption and investment, it may increase the burden on households and businesses.

Core Goods and Services Strengthening Simultaneously, Path to Inflation Decline More Complicated

Data from the US Bureau of Labor Statistics shows that the year-on-year CPI increase in September rose from 3.4% in August to 3.7%, with a month-on-month increase of 0.6%, the largest increase since April. The rise in gasoline prices is an important driver of the overall acceleration in inflation, but the core CPI is also higher than expected, indicating that price pressures beyond energy are also strengthening.

Timiraos noted on social media that core goods prices rose 0.25% month-on-month in September, the largest increase in a year; housing prices rose 0.39%; and core service prices excluding housing rose 0.42%. The latter's annualized growth rate over three months dramatically rebounded from 1% in July to 4.6% in September.

The significance of this set of data is that price increases are not concentrated in a few items. The simultaneous strengthening of core goods, housing, and other service prices makes it more difficult for the Federal Reserve to simply attribute the rebound in inflation to energy shocks.

Reuters cited comments from several market participants indicating that inflation pressure is spreading to areas beyond energy. LPL Financial Chief Economist Jeffrey Roach believes that the latest data suggests that the "last mile" for inflation to return to target levels will still be bumpy, and interest rates may need to remain high for a longer time. Schroders Senior Economist George Brown also pointed out that core inflation higher than expected indicates that domestic price pressures in the United States have not continued to ease.

The rise in energy prices may also transmit through transportation, logistics, and other input costs to a wider range of goods and services. If companies continue to pass costs onto consumers, short-term energy shocks could evolve into a more enduring inflation problem.

Bets on Rate Hikes Soared Briefly, Market Still Divided on October and December Actions

After the CPI report was released, the interest rate market quickly adjusted its pricing. Bloomberg reported that investors briefly pushed the probability of a Federal Reserve rate hike in October above 50%, but as trading progressed, the related probability fell back to about 40%. The market's pricing for a cumulative tightening of about 40 basis points by January next year is also lower than the more than 50 basis points that was reached after the report was released.

This indicates that while the market has clearly increased its expectations for further rate hikes, a consensus on the Fed taking action this month has not yet formed.

Some institutions have begun to adjust their forecasts. Economists at Citigroup, who were previously skeptical about further rate hikes, have included a December rate hike in their predictions after the September CPI was published, while still expecting the Federal Reserve to shift to rate cuts in 2027.

Karen Manna, Fixed Income Strategist and Portfolio Manager at Federated Hermes, stated that the strong CPI report is significant, but "one data point does not constitute a trend." She believes that this report is more likely to delay the Fed's process of building confidence in a decline in inflation, rather than necessarily meaning that the pace of rate hikes will accelerate immediately.

Other market participants cited by Reuters generally believe that the latest data reinforces the rationale for the Fed to raise interest rates again this year, but whether action will be taken in October still depends on how Fed decision-makers assess inflation trends. Some individuals prefer to remain unchanged this month and raise rates in December; others warn that if energy prices remain high, the degree of policy tightening may exceed current expectations.

"New Federal Reserve News Agency": CPI at Least Strengthens the Rationale for December Rate Hike

Timiraos believes that the market now needs to judge: whether the Fed will avoid another rate hike in October because of a single somewhat strong inflation report, or will consider that broader price pressures indicate the need to act quickly. He pointed out that it can be at least confirmed that this CPI report further strengthens the rationale for raising rates again in December.

He believes that investors will focus on Waller's Q&A session during the IMF annual meeting in Bangkok, which starts at 11:30 PM Eastern Time on Thursday, 11:30 AM Beijing time on Friday.

He pointed out that this is Waller's last public statement before the so-called quiet period before the Federal Reserve's monetary policy meeting on October 27-28.

Economists Warn of "Inflation Spiral," Real Purchasing Power and Midterm Pressures Intertwined

The Wall Street Journal also highlighted the risks of inflation becoming self-reinforcing. If households and businesses begin to generally expect prices to continue to rise, consumers may purchase in advance, and businesses may be more proactive in raising prices, thereby further increasing inflation expectations. However, rising inflation expectations do not necessarily mean that a wage-price spiral has formed, as subsequent developments depend on changes in the labor market, consumer demand, and energy costs.

Heather Long, Chief Economist at Navy Federal Credit Union, stated that wage growth for Americans is being completely offset by inflation, and the Federal Reserve has not seen substantial progress in inflation; the rise in fuel prices is also beginning to transmit to other areas.

This is also why inflation may become a core economic issue before the midterm elections. Rising prices directly affect household daily expenditures, and if nominal wage growth does not keep pace with prices, consumers' real purchasing power will decline. Changes in prices for gasoline, food, transportation, etc. are particularly likely to affect voters' perceptions of the economy.

For the Federal Reserve, this means that the policy dilemma is deepening: if energy and other costs continue to push inflation higher, prematurely loosening policies could make it harder for prices to fall; but if rates are further raised, the costs of mortgages, auto loans, and business financing may continue to rise, further squeezing household budgets and business investments.

US Stocks and Bonds Under Pressure, Focus Shifts to Waller's Statements and Inflation Trends

After the inflation report was released, the market's re-pricing of the interest rate path impacted risk assets. Following the CPI release on Wednesday, US Treasury prices briefly plunged, with the yield on the two-year Treasury note at one point rising by 16 basis points to about 4.95%. The US stock market gradually retraced most of its gains after opening, and by the end of the bond market, it had only risen by 1 basis point during the day; the dollar index surged, reaching an intraday high not seen since April 2025; all three major US stock indices closed lower, with the S&P down 1.1%, the Nasdaq down nearly 1.9%, marking their largest declines in over two months and a three-day losing streak.

US Treasury yields spiked and then fell on Wednesday

For the stock market, higher interest rate expectations may lower valuations, particularly affecting technology stocks and other sectors sensitive to financing costs; for the bond market, if the market further incorporates rate hikes, yields may continue to rise, and bond prices would face pressure.

Going forward, the market will closely monitor Waller's Q&A at the IMF meeting, as well as subsequent inflation, employment, and energy price data. If core service prices continue to accelerate and energy costs remain high, the possibility of a rate hike in December will further increase; if subsequent data indicates a decline in inflation, with consumption and employment cooling simultaneously, the Federal Reserve may still choose to wait.

The latest CPI report is not yet sufficient to determine that the Federal Reserve will definitely raise rates in October, but it significantly increases policy uncertainty and strengthens the rationale for another rate hike in December. What the market truly needs to judge is no longer just how much energy prices will push short-term inflation up, but whether this round of shocks is changing the inflation trend and the Federal Reserve's policy path.