U.S. Inflation Eases to 3.0% in September, Fueling Doubts Over Further Fed Rate Hikes

U.S. Inflation Slows in September, Easing Pressure on Fed Policy

The U.S. Consumer Price Index (CPI) rose 0.3% in September, slightly below the 0.4% gain recorded in August and under consensus forecasts. On a year-over-year basis, headline inflation came in at 3.0%, down from the anticipated 3.1%, according to the latest report from the Bureau of Labor Statistics. Core CPI, which excludes food and energy, advanced 0.2% for the month — its smallest gain since June — offering a modest reprieve for policymakers and markets closely monitoring disinflation progress.

Energy Prices Drive Headline Index Higher

The headline rise was largely driven by a 4.1% monthly increase in gasoline prices, pushing the broader energy index up by 1.5%. Despite this sharp gain in September, gasoline prices remain 0.5% lower year-over-year. In contrast, energy services fell 0.7%, with piped gas service prices plunging 1.2%, providing some offset to overall energy costs. Traders will note that energy remains a volatile component and may continue to introduce month-to-month variability in headline inflation prints.

Core Categories Show Signs of Cooling

Core inflation cooled to 0.2% month-on-month after two consecutive 0.3% readings, reflecting easing in shelter and services categories. Shelter costs, which carry significant weight, rose just 0.2%, while owners’ equivalent rent ticked up only 0.1% — the lowest increase since early 2021. Motor vehicle insurance and used car prices both declined by 0.4%, adding to disinflationary signals. Notably, medical care services rose 0.2%, reversing the previous month’s decline.

Food Inflation Remains Stable

Food prices increased 0.2% in September, following a stronger 0.5% gain in August. The food-at-home index rose 0.3%, led by increases in nonalcoholic beverages and cereals. Conversely, dairy prices declined by 0.5%, while the food-away-from-home index posted a modest 0.1% rise. On a 12-month basis, food inflation remains elevated at 3.1%, with meats and beverages leading gains.

Year-Over-Year Inflation Still Above Target

Annual core inflation held at 3.0%, unchanged from the prior month. This figure remains notably above the Federal Reserve’s 2% target, although recent month-on-month figures suggest a gradual cooling. The Fed is likely to view this report as constructive but insufficient for immediate policy shifts, especially with sticky components like shelter and services still posting gains.

Market Forecast: Cautiously Bearish for USD

Given the softer-than-expected CPI figures and declining momentum in core categories, market sentiment is likely to lean bearish on the U.S. dollar in the near term. Reduced inflationary pressure diminishes the case for further rate hikes, potentially limiting upside for Treasury yields and easing support for the greenback. Traders may begin to reprice expectations for the Fed’s policy path heading into year-end.