September CPI Expected to Show Fuel Prices Pushing Inflation to 3.7%

A fuel shock heads into the official numbers

Drivers paid more for fuel all through September. On Wednesday, October 14, the Bureau of Labor Statistics is expected to show how much of that reached the consumer price index. The September CPI report comes out at 8:30 a.m. Eastern. It is the last inflation reading Federal Reserve officials will see before they meet on October 27–28.35

Forecasters broadly agree that headline inflation rose last month. A survey of economists by Dow Jones Newswires and The Wall Street Journal puts the annual rate at 3.7% for September, up from 3.4% in August.1 FactSet's consensus is slightly lower at 3.6%.2 The Cleveland Fed's nowcast is close to that, at 3.60% for headline and 2.39% for core.3 Either number would be the highest annual rate in about four months, below the 4.2% peak reached in May.58

For the monthly change, the consensus is about 0.6%, up from 0.4% in August. That would be the largest monthly gain since April.510 Deutsche Bank forecasts 0.57% and Wells Fargo 0.59%. Both say gasoline explains most of the jump, and Deutsche Bank expects seasonally adjusted motor-fuel prices to rise 9.6%.7 Analysts expect the energy index as a whole to climb about 5.5% in the month.5 Truflation, which tracks prices independently, estimates gasoline rose 4.8% from August and is up 32.1% from a year earlier.4

The cause is the war involving Iran, which has disrupted oil supplies from the Middle East. Diesel prices are at record highs.15 August had already shown the pressure building, with energy prices up 2.1% in the month and 16.3% over the year.3

Core inflation is the number that matters

The headline figure is expected to be bad, so markets are watching core CPI, which leaves out food and energy. Nearly every forecaster expects core prices to have risen about 0.2% in September, down from roughly 0.3% in August.267 Wells Fargo says much of August's strength came from a one-off jump in wireless phone service prices that is unlikely to happen again.7

Forecasts for the annual core rate split between 2.4% and 2.5%. FactSet, the Cleveland Fed and Truflation expect 2.4%, the same as August.234 The Journal's survey and the consensus figures cited by Goldman Sachs and TradingKey point to 2.5%.1910 Goldman expects a 0.24% monthly gain, which would lift the rounded annual rate to 2.5%.10 In practice the gap is mostly a matter of rounding. What it shows is that core is expected to stay around 2.5%, not keep falling.

There is also a less obvious risk in the data. Credit Agricole notes that even if core rises only 0.20%, the three-month annualized core rate would jump to about 2.84%. That is mainly because an unusually weak June reading drops out of the calculation.7 A Fed that looks at short-run trends could see that as rising momentum, even if September itself is calm.

The reports also differ in tone. Morningstar's preview says inflation outside energy is "subdued" and that the report should let the Fed be patient.2 Bank of America economists agree that second-round effects should stay limited. They add that risks lean to the upside and that core could rise 0.3% for a second straight month.2 Analysts list several ways fuel costs could spread to other prices. Airline fares were up 23.4% over the year as of August. Diesel and delivery costs can reach services prices with a lag. The ISM prices index for manufacturers hit 77.9 in September, and the services gauge stood at 74.0.34

The CPI–PCE gap

The usual story is that core CPI near 2.4% looks almost back to normal. But that figure looks much better than the Fed's preferred measure, the personal consumption expenditures (PCE) price index. Reports disagree on how wide the gap is. One preview puts August core PCE at 3.0%.3 Deloitte says core PCE rose 3.4% over the same period.13 Either way, the Fed's target measure is well above 2%. The Fed's own median projection has core PCE at 3.4% for 2026.3

For that reason, many economists will read the CPI report mainly for what it implies about PCE. Samuel Tombs of Pantheon Macroeconomics says the CPI data would need to point to core PCE rising more than 0.30% in the month to put an October rate hike back in play. He expects about 0.2%.1 Goldman's estimate of 0.20% for core PCE is similar.10

The Fed's choice: energy shock or jobs slowdown

The Fed, now led by Kevin Warsh, raised its target range by a quarter point to 3.75%–4.00% on September 16. It signaled at least one more increase this year.25 The median projection is 4.1% by year-end, which implies one more quarter-point hike.3 Richmond Fed President Tom Barkin said in late September that whether more hikes are needed is an open question.10

The labor market has since weakened. September payrolls rose by only 29,000, and unemployment climbed to 4.2%.4 After that report, the odds of an October hike fell to about one in four.5 Market previews now mostly expect a pause in October, with the next increase possibly in December.29 Franklin Templeton's Jeffrey Schulze says the weak jobs report shows the labor market is not driving inflation from the Fed's point of view.2

That leaves the Fed with a difficult tradeoff. Prices are rising mainly because of an energy supply shock, while job growth is slowing. Hiking into that risks hurting growth over a problem that rate increases can't fix directly. Fed Governor Christopher Waller warned on October 8 that if inflation lasts long enough, it can become built into expectations.3 The University of Michigan survey supports his concern. Households expect 4.6% inflation over the next year and 3.4% over five years.3 Most consumers also expect gasoline to keep getting more expensive.6

Strong spending that may not last

The CPI report comes as the economy looks strong in some ways and fragile in others. The Bureau of Economic Analysis revised second-quarter real GDP growth up to a 2.2% annual rate, from 1.5%. It also raised first-quarter growth to 2.5%.16 Consumer spending growth was revised up to 3.8%. Real final sales to private domestic purchasers grew 4.6%.18 EY expects growth in the third quarter to exceed a 4% annual rate.12 The first estimate of that figure is due October 29, the day after the Fed's decision.16

Consumers are driving that growth. Personal consumption added 2.5 percentage points to second-quarter growth, more than the economy's entire growth rate and nearly three times the contribution of private investment.19 Bank of America card data shows spending growing across all income groups.19 Retail sales jumped 1.2% in August.14

The question is how long that can continue. Inflation has grown faster than wages for five straight months.1 Real personal spending rose 0.6% in August only because households saved less. The saving rate fell to 4.1%, from 4.6% in July and 5.6% in January.18 Deloitte points out that spending has grown faster than after-tax income since mid-2024. It expects real consumer spending to slow from 2% this year to 1.4% in 2027.13 EY sees the gains of growth going mostly to corporate profits, which reached a record 14.5% of GDP. Meanwhile, households continue to lose income to inflation.12

What to watch

The most likely outcome is a headline figure of 3.6% or 3.7%, driven almost entirely by fuel, with core rising about 0.2%. That would back the view that the Fed holds rates in October and leaves December open.25 Wells Fargo's economists expect the report to show underlying inflation pressure still contained even as energy pushes the headline number around.1

Our reading: an energy-driven headline figure is not the main risk. Spending is being supported by falling savings while real wages shrink. In that situation, even a modest rise in core inflation would hit households harder than the topline numbers suggest. A core gain of 0.3% or more would likely put a hike back in play within a few weeks.35 A soft core reading would be welcome news. It would not, however, fix the gap between household budgets and prices.

The September producer price index, retail sales and industrial production reports follow later in the week. They will show whether the strength in consumer spending is holding up.10