Grocery Prices Dip as 3.7% Inflation Sinks Consumer Confidence

A hot report with one cool spot

Inflation picked up again in September. The main cause was fuel, but the latest Consumer Price Index also shows price pressure moving into areas that have little to do with gasoline. The Bureau of Labor Statistics reported that overall prices rose 0.6% from August, which pushed the annual rate to 3.7% from 3.4% the month before.3 Economists had expected an annual figure of 3.6%, so the result was a tenth of a point hotter than forecast.10 Core prices, which leave out food and energy, rose 0.3% for the month and 2.6% over the year. Both figures were higher than economists polled by LSEG had predicted.10

Groceries were the exception. Food-at-home prices fell 0.1% in September and stood 1.8% above a year earlier.1 That is a clear slowdown from the 2.2% annual pace in August.3 Popular framing says inflation is being driven by "gas, groceries and airfare," but the September data says something different. Groceries were the one big household category that gave shoppers a small break. The worry is that the break may not last.

Gas and airfare drive the numbers

Coverage of where the heat came from is consistent across outlets. Gasoline prices jumped 9.1% in a single month and were up 34.2% from a year earlier. The BLS said gasoline accounted for more than half of the monthly increase in the overall index.38 The broader energy index rose 5.2% for the month and 20.4% over the year.2 Heating oil, which matters in the Northeast as cold weather arrives, rose 15.3% in September and about 74% over the year.2

The energy surge is widely tied to the war with Iran, which began in late February and has disrupted global oil supplies.19 AAA put the national average for regular gasoline at $4.33 a gallon on October 14, compared with $2.98 just before the war started.89 Diesel, which hit a record in late September, averaged $6.29.8

Airfares are the clearest case of fuel costs reaching travelers. Fares rose 1.2% in September and are up about 22% from a year ago as airlines pass on higher jet fuel costs.410 One live blog also listed a 2% monthly gain for airfares, but most outlets reported 1.2%, and that is the more reliable figure.2 Fuel is not the whole explanation for travel costs. Economists also point to strong demand, and hotel and motel rates are up more than 4% over the year.9

Why the core numbers matter more than gas

Gasoline makes headlines, but the part of the report that should concern policymakers is what happened outside energy. Shelter costs rose 0.4% in September, and used-car prices climbed 0.7%.5 Over the past three months, core CPI has risen at a 3.4% annualized rate, up from 2% in August.5 The Fed's "supercore" measure, which covers services excluding housing, rose 0.4% for a second straight month and has run at a roughly 4.6% annualized pace over three months.2

Analysts largely agree on what this means. A Fitch Ratings economist said higher energy costs are starting to spread into broader services prices, which raises the risk that the burst of inflation will last.5 KPMG argued that the Fed cannot look past the September report: energy set things off, and sticky prices for services, shelter and goods kept them going.7 Markets reacted fast. According to CME FedWatch, traders put the odds of a quarter-point rate increase at the October 27–28 Fed meeting at about 47%, up from 22% the day before.5 Not every Fed official sounds eager. Governor Christopher Waller has suggested that higher Treasury yields may already be slowing the economy, which could reduce the need for another hike.4

The policy debate matters less to households than one plain fact: prices are rising faster than pay. Real average hourly earnings fell 0.5% in September, because a 0.1% gain in nominal wages was overwhelmed by the 0.6% rise in prices.7 One analysis found that since January 2025, hourly earnings and prices have both risen about 5.5%, meaning workers have made almost no real progress in nearly two years.2

The grocery break is real but fragile

The grocery decline was broad enough to count. Ground beef fell 0.8% in September but is still 5.4% more expensive than a year ago.1 The beef and veal index fell 1.0%, and milk fell 2.0%.26 KPMG reported that large grocery chains used tariff refunds to fund discounts after lower-income households cut back on purchases.7 If that is right, the September dip came partly from retailers protecting sales, not from lower costs in the supply chain.

The average also hides prices that kept rising. Rice rose 1.1% for the month and is up 7.1% over the year. Fruits and vegetables rose 0.5% in September, and lettuce jumped 3.9%.26 The U.S. Department of Agriculture still expects grocery prices to rise 2.4% in 2026. It forecasts beef up 9.4% for the year, fresh vegetables up 5.7%, and sugar and sweets up 6.6%, while eggs are expected to fall about 29%.2124 The USDA trimmed its forecast in September, but that means smaller increases, not lower prices.27

The bigger risk is diesel. In late September, Purdue economist Jayson Volpe told an industry briefing that food companies and retailers had worked to hold prices down through 2026 but probably could not keep doing so. He said he expected grocery inflation to rise in the fourth quarter, with the full year possibly averaging about 2.7%.29 Economists quoted after the CPI release made the same point: sharply higher diesel prices could still push up food costs.25 KPMG called diesel the "sleeper threat" because higher freight costs take time to reach prices and tend to stick once they do.7 Taken together, the evidence points one way. September's grocery figure looks like a pause before shipping costs show up on store shelves, not the start of lasting relief.

The relief is also arriving when some households have less support. KPMG noted that SNAP benefits were cut this year, with about five million people losing benefits and many others getting smaller amounts.7 For those families, a 0.1% monthly drop in grocery prices does little to offset higher prices built up over several years.

Consumer confidence near record lows

Surveys confirm how households feel. The University of Michigan's preliminary October sentiment index fell to 46.3 from 48.1, the lowest reading since May and below the 47.6 economists expected.19 The drop came entirely from the current-conditions index, which fell to a record low of 44.7 from 50.9.20 The expectations index rose slightly, to 47.3, its first gain since July.19

Inflation expectations are rising as well. Consumers now expect prices to rise 4.7% over the next year and expect long-run inflation of 3.5%, both the highest since May.14 Survey director Joanne Hsu said confidence fell sharply among lower-income consumers and people with smaller stock holdings.17 Hsu also said people across the political spectrum agree the economy's prospects have weakened since the Iran conflict began.19 The Conference Board's separate consumer confidence index fell 6.7 points in September to 81.9.18 Its measure of CEO confidence dropped to 46, the lowest since the second quarter of 2025, so pessimism is no longer limited to households.18

How shoppers are responding

The most telling result for retailers came from a special Michigan survey question. Only 31% of consumers said they would keep spending as usual on items with big price increases. Another 54% said they would cut back, and 16% said they would stop buying those items altogether.20 Holiday plans show the same caution. Circana found that Americans expect to spend $779 on average this season, down from $796 last year, and 74% plan to save money through promotions and store brands.14

Weak sentiment does not mean total spending will fall. Several analysts say spending is still being supported by higher-income households, the "K-shaped" pattern seen in recent months.16 That fits the CPI data. Strong demand from consumers who can absorb price increases helps explain the jump in travel prices, while lower-income households cut back at the grocery store.257 EY-Parthenon's Gregory Daco described the situation as income erosion and said inflation is likely to stay elevated through year-end.25

Outlook

The September report was the last CPI release before the midterm elections. Democrats quickly blamed the administration's war and tariff policies, and the White House pointed to the energy shock.2 Whatever the politics, the near-term picture is clear. Gasoline may ease if Middle East supply improves, but diesel, services and shelter costs are building momentum that a ceasefire would not quickly undo. Grocery prices helped households in September. Unless freight costs fall, that help will probably be gone by the time the October data is released on November 10.22