U.S. core CPI came in hot for the second straight month, up +0.3% month-over-month (MoM) versus +0.2% expected and up +2.6% versus +2.5% year-over-year (YoY). Headline CPI was also higher than anticipated, up +0.6% MoM and +3.7% YoY – a level not seen for the measure since May.
Energy prices continued to drive the increase in headline CPI. Gasoline was up another +9.1% in September, and fuel oil climbed by +15.3% MoM; energy in aggregate was up +5.2% MoM and +20.4% YoY. Food costs were mercifully flat during the month, led by food at home which was down by -0.1% and is up only +1.8% YoY.
There were few places to hide outside of food, however, as today’s report reflected a move higher in prices across a very wide range of categories – a nod to the broad diffusion of inflationary forces that Fed Chair Kevin Warsh cited during the Fed’s September press conference. Driving the hotter CPI print was shelter, which rose by +0.4%, with owners’ equivalent rent up +0.3% and rents and lodging both higher by +0.2% MoM. Airfares (+1.2%), recreation (+0.5%), used cars & trucks (+0.7%), new cars (+0.4%), education (+0.6%), apparel (+0.3%), and medical care services (+0.3%) were contributors to higher print as well, indicating that energy price pressures are likely passing through to the consumer via products and services. Transportation services were up +0.6%, while broad supercore services posted a +0.4% MoM increase, translating to +3.1% YoY. Bright spots were declines in TVs (-1.9%) and household furnishings and supplies (-0.2%), although the read-through is that a continued weak housing market may be the basis for the disinflation in those categories.
Prior to today’s report, the probability of a Fed hike at its October meeting had fallen to under 25%; it has now crested 50% once again. While our view remains that the Fed will not hike rates later this month but will instead wait until there is a clearer picture in December, volatility is likely to increase in the short term as investors gauge the commitment the Fed has to sending a strong message between now and the end of the year. The upward pressure on prices, coupled with the moderation in wages, may create consumer concerns as well. With prices remaining elevated and discretionary income rising at a slower pace, softer consumer spending could move from risk to reality. As outlined in our recently released Q4 2026 Asset Allocation publication, we are recommending a more conservative stance, trimming our exposure to the broadening theme in U.S. equity markets, and maintaining a tilt to quality credits in fixed income. However, we acknowledge that the combination of Q3 earnings, the upcoming Fed meeting, and the U.S. midterm elections is likely to create investment opportunities – flexibility and selectivity will be required to capture them between now and the end of the year.
