US Inflation Rate Climbs to 3.7% as Hiring Stalls at 29,000 Jobs

Prices up, hiring down

The US inflation rate rose to 3.7% in September. The labor market slowed almost to a halt over the same weeks. Taken together, the two reports put the economy in a stagflation-tinged position that the Federal Reserve will find hard to manage.

The Bureau of Labor Statistics said the consumer price index rose a seasonally adjusted 0.6% in September, which lifted the 12-month rate to 3.7% from 3.4% in August.1 Economists surveyed by Dow Jones had forecast 3.6%.1 Core CPI, which excludes food and energy, rose 0.3% for the month and 2.6% over the year. Both figures were above the 0.2% and 2.5% that forecasters expected.1 It was the largest monthly gain since March.5 Headline inflation has now run above 2% for some time. It started 2026 at 2.4%, peaked at about 4.2% in May, settled at 3.4% in July and August, and then rose again.6

Twelve days before the CPI release, the September jobs report showed nonfarm payrolls up only 29,000. The Dow Jones consensus was 84,000, and the unemployment rate rose to 4.2%.21 The figures do not support the idea that hot prices reflect an overheating job market.

Energy is the main driver, but not the only one

All the major outlets agree that energy drove the headline number. Gasoline rose 9.1% in September and accounted for about half of the CPI's monthly gain.1 Energy inflation over 12 months reached 20.4%, up from 16.3% in August.2 Producer prices pointed the same way: the PPI rose 6.3% from a year earlier, and import prices rose 8.1%.24

The more important point is that the pressure is no longer limited to fuel. CNN described price increases as broader than economists had expected and reaching well past the gas pump.3 Shelter inflation rose to 3.2%, and services inflation rose to 3.1%.2 Airline fares were up 22.4% from a year earlier, which looks like jet fuel costs feeding into consumer prices.4 Sonu Varghese of Carson Group calculated that core inflation ran at a 3.7% annualized pace in September. He also warned that higher diesel prices and the AI investment boom have not yet fully shown up in the data.1

The coverage differs on how alarming the core numbers are. Annualizing a single month magnifies the result, as Varghese's 3.7% figure shows. Other analysis notes that core CPI, at 2.6%, remains below its May reading of roughly 2.85%, which makes September a step up rather than a new high.5 The trimmed-mean and median CPI measures both stood at 2.6% to 2.7%.2 This publication's reading is that underlying inflation is not yet out of control. Still, the direction has changed, and an energy shock of this size usually spreads into other prices with a delay.

A labor market weaker than it first appeared

The jobs report undercut a widely held forecast. In late September, Bloomberg's preview expected hiring to stay solid as economic momentum built, with payrolls near 90,000 and unemployment holding at a one-year low of 4.1%.30 The actual report was softer on payrolls, unemployment and wages.28

Revisions made the picture worse. July's payroll change was cut from +21,000 to −10,000, and August's from +162,000 to +133,000. That removed 60,000 jobs from the two months combined.24 Over the previous 12 months, payrolls grew by an average of only 45,000 a month.24 Health care has been the most dependable source of hiring, but it added 17,000 jobs in September, about half its 12-month average. Financial activities employment is down 129,000 from its May 2025 peak.24

Outlets read the rise in unemployment differently. CNBC said it came mostly from people joining the labor force.21 FXMacroData argued that new entrants could not explain the higher jobless rate.29 The official numbers favor CNBC's view: participation rose to 61.8% from 61.6%.22 The BLS also called the changes in both payrolls and unemployment small, and noted that the jobless rate has stayed between 4.1% and 4.3% since March.24 An analysis from The Fiscal Lab added that the 0.1-point increase was not statistically significant.26 The fair conclusion is that the labor market is stalling, not collapsing. Hiring has nearly stopped, but layoffs have not jumped.

Wages lag prices

Average hourly earnings rose 0.1% in September to $37.81, a 3.0% gain over 12 months.24 With CPI at 3.7%, real hourly earnings fell 0.7% from a year earlier.22 Heather Long, chief economist at Navy Federal Credit Union, pointed to that gap between wages and prices and said Americans' frustration with the economy has a real basis.3 CNN noted that this was the last CPI report before the midterm elections, which makes the squeeze on real pay a political issue as well as an economic one.3 CBS reported that President Trump has maintained inflation is low even as the index moved higher.9

Consumers keep spending, partly from savings

Consumer spending has held up so far despite falling real wages. In August, personal consumption expenditures rose 0.9% in dollar terms and 0.6% after adjusting for inflation. Personal income rose only 0.2%, and real disposable income was flat.32 The saving rate fell to 4.1%.32 One analysis called that the lowest rate in nearly four years and estimated that households saved about $122 billion less than in July.37 That analysis also cited a Reuters observation that the AI-driven stock rally is supporting spending. If so, the strength is concentrated among households that own stocks.37

The Fed's preferred inflation gauge gave a calmer reading. Headline PCE inflation was 3.4% in August and core PCE was 3.0%, both below forecasts of 3.7% and 3.3%.40 Part of that apparent cooling comes from the Bureau of Economic Analysis's annual update, which changed how some prices are calculated and revised the series back to 2021.37 CNBC said it was not immediately clear how much the methodology changes affected the final figures.36 An unusual pattern followed: core PCE inflation (3.0%) is now above core CPI (2.4% in August). Normally the relationship runs the other way.37

Growth stronger than first reported

The GDP data run against the weak jobs numbers. The third estimate for the second quarter raised real growth to a 2.2% annual rate from 1.5%, a larger revision than economists expected.17 Real consumer spending was revised to 3.8% annualized, and durable goods spending rose 7.4%.13 Real final sales to private domestic purchasers, a measure of underlying demand, grew 4.6%.11 EY credited strong consumer spending and fast-growing business investment tied to AI, and described the economy as robust but exposed, partly because the growth is concentrated in a few sectors.13

Price measures in the GDP report remained high. The second-quarter PCE price index rose at a 5.0% annual rate, and the core measure rose 3.3%. Both were revised down 0.3 point.11 The advance estimate for third-quarter GDP is due October 29. Trading Economics' model expects 3.1%.12

The Fed's position

The Fed raised its benchmark rate by a quarter point on September 16, to a range of 3.75% to 4.00%.10 Before the jobs report, markets put the chance of another hike in October at roughly 70%. After the weak payroll figure, that estimate fell to about 14%.28 On Kalshi, the betting odds that the Fed would hold steady rose to 85%.28 Long-term borrowing costs were already high: Fox Business reported the 10-year Treasury yield above 5.2% as oil prices and inflation fears pushed rates up.40 After the CPI release, the 2-year yield moved more than the 10-year, a sign that traders were reassessing near-term Fed policy.5

The September data give each side of the Fed's debate some support. Those who favor tightening can cite broader price increases, a hotter core CPI and solid demand in the GDP data. Those who favor holding can cite stalled hiring, cooling wages and a revised PCE gauge that is lower than expected. In this publication's assessment, the weak jobs report probably takes an October hike off the table. A CPI reading this hot makes a quick pivot to rate cuts just as unlikely. The coming data will decide which way the Fed leans: the third-quarter GDP and September PCE releases on October 29, the October jobs report on November 6, and October CPI on November 10.1238242