In September, underlying inflation in the United States rose more than anticipated, marking a pause in the recent progress toward easing price pressures.

The core Consumer Price Index (CPI), which conveniently leaves out those pesky food and energy costs, climbed by 0.3% for the second month in a row, ending a series of softer figures. Over a three-month annualised rate, it rose by 3.1%, the highest since May.

Economists see the core CPI as a better gauge of underlying inflation than the headline number. This measure increased by 0.2% from the previous month, driven by housing and food costs, which made up more than 75% of the rise. Goods prices, having steadily declined over the past year, also decided to jump back into action.
As did clothing and furniture, new and used car prices rose, contributing to the second increase in goods prices since June 2023. Grocery prices saw their steepest rise since the start of the year, particularly for eggs and fresh fruit. Car insurance, medical care, and airfares posted notable increases in the services sector. Ticket prices for sporting events surged by a record 10.9%, partly thanks to the start of the football season.
Shelter costs, the largest category in services, rose by 0.2%, a sharp drop from August’s 0.5% gain. Owners’ equivalent rent—a subset of housing and the biggest single component of the CPI—rose by 0.3%, also decelerating from the previous month. Hotel prices, meanwhile, defied expectations by falling.

With inflation running hotter than expected and last week’s robust employment report, the debate is now on whether the Federal Reserve will opt for a modest rate cut next month or pause after September’s significant reduction. Fed officials have forecast another half-point cut by the end of the year, with many saying they are closely monitoring the labour market’s progress.

To summarise the optimists: inflation is dying, but it’s not dead. Following September’s surprisingly strong job numbers, this report urges the Fed to remain cautious about the pace of its easing cycle. The likely path is a quarter-point rate cut in November; a December reduction should not be taken for granted.

The Fed began reducing borrowing costs in September with a hefty 50 basis-point cut, prompted by continued inflation and underwhelming labour market data. The minutes from the latest meeting, published on Wednesday, revealed a vigorous debate about the size of the reduction, with officials leaning towards a more gradual approach.