September CPI Forecasts Show More Improvement on Inflation, but Risks Remain

Forecasts for the September Consumer Price Index report show inflation continuing to soften overall, thanks to falling energy prices.

The Federal Reserve began cutting rates in September as inflationary pressures eased and the labor market started showing signs of cooling. Analysts say another month of improvement isn’t likely to change the Fed’s trajectory over the long term, but they warn that risks remain in the inflation outlook. “It seems that the Fed is very comfortable with where inflation is and where it’s trending,” says Josh Hirt, senior US economist at Vanguard. “We’ve brought some caution to that view … specifically around the services side.”

Overall, economists anticipate that consumer prices rose 0.1% on a monthly basis in September after rising 0.2% in August, according to FactSet’s consensus estimates. That would bring the overall inflation rate down to 2.3% from 2.5% in August. Economists expect core inflation, which excludes volatile food and energy prices, to remain slightly higher thanks to rising prices for used cars, hotels, airfare, and car insurance. The consensus estimate is for 0.2% growth in core inflation on a monthly basis in September and 3.2% growth on an annual basis.

Analysts emphasize, however, that one firmer-than-expected month of inflation data doesn’t change the larger trend of moderating price pressures. “While we expect core CPI to be on the firmer side of recent readings in September, our forecast does not change our medium-term outlook for further disinflation,” Bank of America economists wrote last week.

Inflation Back in Focus

Thursday’s CPI data will come on the heels of the stronger-than-expected September jobs report, which showed that the US economy added 254,000 jobs last month. That data, along with upward revisions to previous months, helped assuage investors’ worries about a slowing economy.

“The data we got on Friday was a lot stronger than expected. There were upper revisions to the prior months, and importantly, the unemployment rate fell further,” explains Brian Rose, senior US economist at UBS Global Wealth Management. “Now that the rise in the unemployment rate is a lot less worrying, the risks to the labor market just don’t seem as high anymore.”

Strong jobs data means inflation is back at the forefront for investors and policymakers, according to Hirt. “We do see some additional focus coming back to inflation.” Vanguard economists expect 0.24% monthly growth on core inflation and 0.10% monthly growth overall. Hirt says these numbers are a step in the right direction, but adds that core inflation is still slightly elevated.

September CPI Report Highlights

• CPI report release date and time: Thursday, Oct. 10, at 8:30 a.m. EST
• The CPI is forecast to rise 0.1% in September after rising 0.2% in August.
• Core CPI is forecast to rise 0.2% in September after rising 0.3% in August.
• The CPI year over year is forecast to rise 2.3% in September after rising 2.5% in August.
• Core CPI year over year is forecast to rise 3.2% in September after rising the same amount in August.

Services Sector Risks

Hirt is especially attentive to the risk of higher inflation from the services sector thanks to strong wage growth, which he says is “still elevated” in the services categories and not fully consistent with a 2% inflation target.

Bank of America analysts also point to the risks stemming from rising oil prices and higher shipping costs, which could push inflation higher in the near term. Shelter costs also remain elevated, which is another major contributor to inflation.

Will the Fed Cut Rates in November?

September’s blockbuster jobs report sparked a major change in investor expectations ahead of the Fed’s November meeting. While markets had previously priced in a half-point rate cut, they now anticipate a smaller reduction. Bond market prices suggest an 88% chance of a 0.25% cut in November, according to the CME FedWatch Tool.

Rose argues that hotter-than-expected inflation data could prompt the Fed to skip a November cut altogether, given lingering concerns about whether inflation is returning to the target range. “It undermines this argument that we better cut rates quickly, because downside risks in the labor market or the unemployment rate look scary,” he says. With the labor market looking healthier, inflation data “becomes more important again.” He thinks a monthly core inflation reading of 0.2% or 0.3% will keep the Fed comfortable, but anything higher than about 0.4% might raise “more serious concerns” for central bankers and increase the probability that they keep rates steady in November.