September CPI Hits 3.7% as Gasoline Surge Lifts Core Inflation

A hotter print than the headline forecast suggested

US inflation picked up again in September. The consumer price index rose a seasonally adjusted 0.6% for the month, and the annual rate reached 3.7%, the Bureau of Labor Statistics reported on October 141. Economists polled by Dow Jones had expected 0.6% for the month and 3.6% for the year1. The annual rate had held at 3.4% for two months before this jump2.

The headline beat the forecast by only a tenth of a point. The more important miss was in core CPI, which excludes food and energy. Core prices rose 0.3% in September and 2.6% from a year earlier. Forecasters had expected 0.2% and 2.5%11. August's core reading of 2.4% had been the lowest since March 2021, so September undid that apparent progress6. Measured over three months, core inflation is running at an annualized 3.4%17.

Every major outlet agrees on the numbers. They disagree about what the numbers mean. Some analysts see an energy shock that is leaking into the rest of the economy. Others see an energy spike sitting on top of an underlying trend that is still calm. The evidence points more toward the first view.

Gasoline did most of the work

Energy is the main story. Gasoline prices rose 9.1% in September, and the BLS said that accounted for more than half of the monthly increase in the index3. The broader energy index rose 5.2% for the month after a 2.1% gain in August6. Over the past year, energy is up 20.4%, gasoline 34.2% and fuel oil 74.2%6. In August, gasoline had driven a little over a third of the monthly increase. In September, it drove more than half6.

Coverage consistently ties the energy surge to the war with Iran, which began in late February with US and Israeli strikes1. Oil has climbed above $106 a barrel since August, up from about $80. Since the war started, regular gasoline is up 45% and diesel 70%3. AAA put the national average at $4.33 a gallon on October 14, compared with $2.98 before the conflict. Diesel cost $6.29 a gallon after setting a record in late September2.

Diesel is where an energy problem turns into a general inflation problem. It moves freight, runs farms and powers shipping3. The Fed's Beige Book, released the same day as the CPI report, said higher oil prices showed up in every district report. Businesses described fuel surcharges that were pushing costs along supply chains5. Producer prices tell the same story: the producer price index rose 1.3% in September and 6.3% from a year earlier14. Costs at the producer level usually reach consumers with a delay.

The case that inflation is broadening

TD Economics described price pressures as fairly broad-based. Shelter, core goods and several non-housing services all firmed17. Core services rose 0.4% for the month, and owners' equivalent rent sped up to 0.3% from 0.2%17. Core goods rose 0.3% after a 0.1% gain in August, led by used vehicles and recreation goods17. Airfares are up about 22% from a year ago, a clear example of fuel costs passing into service prices14.

Capital Economics said the core surprise was broad and could not be traced to obvious one-off factors. In its view, that makes an October rate hike possible again5. Carson Group's Sonu Varghese noted that core inflation ran at a 3.7% annualized pace in September. He also warned that higher diesel prices and the AI boom have not yet fully worked through prices1. CNBC's breakdown lists tariffs, data-center construction and strong travel demand alongside energy as upward pressures4.

Raisin, a savings platform, reads the report differently. It argues the gap between 3.7% headline inflation and 2.6% core inflation shows underlying pressure is still cooling. It also points to weak September hiring of 29,000 jobs as a reason the Fed may hold20. That view understates two things. Core rose faster than expected, and the monthly gains were spread across many categories. Still, a 2.6% core rate is far below the headline rate, and part of the market agrees with Raisin's caution.

There were some offsets. Grocery prices fell 0.1% in September, and overall food prices were flat6. Communications costs also dipped16. These small declines were not enough to change the overall picture.

Consumers keep spending, but paychecks are falling behind

Households have not pulled back yet. The Census Bureau reported on October 15 that retail sales rose 0.8% in September, about twice what forecasters expected, after a 1.3% gain in August37. Bank of America card data showed spending per household up 6.2% from a year earlier, or 5.1% excluding gasoline. Growth was spread across retail and services and across income groups. The National Retail Federation forecasts holiday sales of $1.013 trillion, up 4.2%. That would be the first holiday season above $1 trillion.

The money behind that spending is less solid. Average hourly earnings rose 0.1% in September and are up 3% from a year earlier. Prices have been rising faster than pay since the spring5. NBC News reports that wages have not kept up with inflation since March3. One analysis estimates real hourly wages are down 0.7% from a year ago and real disposable income is up only 1.3%. It concludes that people are spending by saving less, not by earning more32. The personal saving rate is 4.1%36. The preliminary University of Michigan sentiment reading for October was 46.3, down from 53.6 a year earlier31.

Retailers describe a K-shaped economy. The NRF's chief economist said wealthier households drive a disproportionate share of sales, while gas and food costs squeeze lower-income shoppers. Bank of America's data is more hopeful on this point. It finds that lower- and middle-income households have narrowed the spending gap with higher earners this year. Some of that difference may reflect what card data captures: rising nominal spending can come from higher prices as much as from more purchases. Bank of America itself notes that strong airline spending mostly reflects higher fares, not more trips.

Growth is strong, which makes the Fed's choice harder

Weak growth would make inflation easier for the Fed to tolerate. Growth is not weak. Second-quarter GDP was revised up to a 2.2% annualized rate from 1.5%23, and first-quarter growth was revised to 2.5%36. Consumer spending added 2.51 percentage points to second-quarter growth31. The Atlanta Fed's GDPNow model estimated third-quarter growth at 3.6% on October 15, and its estimate for consumer spending rose to 3.6% after the retail sales report23.

That estimate needs a caveat. GDPNow has fallen from above 5% in September21, and inventories account for roughly half of the estimated third-quarter gain23. Deloitte expects real consumer spending to slow from 2% this year to 1.4% next year as inflation and higher rates weigh on households34. The BEA's first official third-quarter estimate comes on October 2923.

What the Fed does next

In September the Fed raised rates for the first time in more than three years. The quarter-point hike set the target range at 3.75% to 4%1. With CPI at 3.7%, the real policy rate is roughly zero32. Forecasts for the October 27–28 meeting differ. CNBC and U.S. News both report that markets expect the Fed to skip October and raise rates in December17. One market snapshot showed a 63% probability of a hold and 37% of a hike18. TD said the odds of an October hike rose sharply after the report, though it still expects only one more increase before year-end17. A Thrivent executive said the rate-hiking cycle is unlikely to end soon2.

The Fed's preferred inflation gauge is the PCE price index, and September's figures come out later this month1. In August, headline PCE was up 3.4% and core PCE 3.0%36. A methodology change by the BEA lowered August's reading by roughly 0.3 percentage points33, so that measure may look less severe than CPI. Chair Warsh has said his priority is to keep the gasoline spike from spreading into other prices9. The September data suggest that is already happening, through diesel, airfares and core services.

The political calendar

This was the last CPI report before the November midterms3. The White House maintains that inflation is low2, while U.S. News reports that Democrats are favored to win back the House as voters react to higher prices7. Kiplinger expects headline CPI to end the year at 4% and core at 2.7%16. If oil stays high and no ceasefire comes, that forecast looks more likely than any quick drop in inflation. Strong spending supports growth, but it also gives the Fed little reason to ease.