Energy prices are once again dictating the inflation trajectory, yet core pressures are easing at the margin, lending support to the Federal Reserve's inclination to stand pat.
The US Bureau of Labor Statistics will release September CPI data on Wednesday, October 14. According to forecasts from Barclays and Morgan Stanley, headline CPI will accelerate on the back of a sharp surge in gasoline prices, while the month-over-month gain in core CPI is expected to narrow slightly from August, largely because the run-up in wireless communication services prices partially retreats. Both institutions project core CPI at 0.24% month-over-month, down from 0.29% in August.
This data will directly shape the Fed's decision at its October policy meeting. Barclays Research argues that although near-term inflation risks remain tilted to the upside, Fed officials are likely to keep rates unchanged in October, continue monitoring incoming data, and push the 25-basis-point hike path out to December.
The minutes from the Fed's September meeting released earlier showed that "most" participants expected one more hike this year but signaled no urgency in October. Fed Governor Waller said rate increases need not occur at consecutive policy meetings and that officials can flexibly time their moves based on economic data. Markets have already pushed back rate hike expectations from October to December. Goldman Sachs sees a greater probability of a December hike, but also believes there is a substantial chance the FOMC ultimately concludes no further tightening is needed.
Energy Drives Headline Inflation, Topline Figure Jumps
Barclays forecasts September headline CPI rising 0.58% month-over-month (seasonally adjusted), with the annual rate climbing to 3.7%, up about 0.3 percentage points from 3.4% in August, though still below the interim peak of 4.2% reached in May this year. Morgan Stanley's projection is slightly higher, at 3.69% year-over-year and 0.62% month-over-month.
Energy is the core driver behind this headline inflation jump. According to Barclays, the energy sub-index is expected to rise 5.05% month-over-month, with gasoline prices surging 9.23% month-over-month and 34.8% year-over-year; heating oil is up an even more dramatic 38.8% year-over-year.
Morgan Stanley notes that persistent tensions in the Middle East are a key factor pushing oil prices higher, which will further feed through to airfares and transportation costs. The Barclays research team also warned in a prior report that rising diesel prices are gradually being passed through to US consumers.
Core Inflation Moderates Slightly, Wireless Communication Retreat Is Main Cause
Even as headline inflation climbs, core CPI pressures have eased somewhat. Barclays forecasts September core CPI up 0.24% month-over-month and 2.5% year-over-year; Morgan Stanley's forecast matches at 0.24%, both down 5 basis points from 0.29% in August.
The main driver of the core inflation slowdown comes from the "education and communication" sub-component. In August, wireless communication services prices jumped abnormally, contributing about 0.1 percentage point to core CPI in a single month. Barclays expects that Verizon's latest round of price increases, combined with a narrower planned increase by AT&T, will still provide a boost to inflation in September but with considerably less force than the prior month.
Meanwhile, airfares and medical services prices remain supportive of core inflation. Morgan Stanley points out that August airfares had already risen 23% year-over-year and forecasts a further 1.8% month-over-month increase in September; Barclays projects airfares up 2.6% month-over-month. Morgan Stanley adds that jet fuel prices are up nearly 90% year-over-year, and fuel accounts for roughly 20% to 30% of airline operating costs. By that measure, airlines' pass-through of higher fuel costs to prices may be nearing completion. In addition, after weakening in August, medical services prices are forecast by Morgan Stanley to rebound 0.55% month-over-month in September.
On core goods, Barclays and Morgan Stanley forecast month-over-month gains in the 0.13% to 0.14% range, roughly flat versus August, with new and used vehicle prices edging slightly firmer.
Housing Inflation Stabilizes, Insurance Drag Persists
The housing component continues its steady trajectory. Barclays forecasts September owners' equivalent rent (OER) up 0.24% month-over-month and primary residence rent up 0.23%; Morgan Stanley projects OER and primary residence rent at 0.25% and 0.20%, respectively. Morgan Stanley notes that since May this year, housing inflation has averaged about 0.24% per month, slightly below the pre-pandemic long-term trend of 0.26%, and expects it to fluctuate around that level in the near term.
Auto insurance continues to weigh on core inflation. Morgan Stanley forecasts September auto insurance premiums down 0.20% month-over-month and expects the negative growth trend to persist through 2027, primarily because improved profitability among insurers is pushing them to cut prices to compete for market share.
On hotel prices, after two consecutive months of abnormal weakness, August saw a strong rebound. Morgan Stanley forecasts a return to flat (0% month-over-month) in September.
PCE Inflation Forecast: Expected to Hold Near 3%
CPI data also provides guidance for the PCE inflation gauge that the Fed monitors more closely. Barclays forecasts September core PCE inflation at 0.22% month-over-month and about 3.0% year-over-year; Morgan Stanley's projection is slightly higher at 0.23% month-over-month.
Barclays researchers Pooja Sriram, Marc Giannoni, Jonathan Millar, and Colin Johanson note that there is some uncertainty around financial services PCE prices, particularly because the Bureau of Economic Analysis (BEA) has adopted a new methodology for estimating portfolio management services prices, and the required nominal expenditure and hours data may not be available in a timely manner, adding to forecasting difficulty. The team said it will further revise its projections after next week's CPI and PPI data are released.
Fed Path: Hold in October, 25 Basis Point Hike in December
On the policy path, Barclays maintains its baseline forecast: a 25-basis-point Fed rate hike in December. The firm notes that due to base effects, medium- and longer-term inflation measures favored by Chair Warsh — such as the 6-month and 12-month gauges — will struggle to improve meaningfully this year, but the outlook for 2027 will brighten considerably.
Recent comments from Fed officials suggest that uncertainty around the distribution of inflation outcomes may support further tightening from a risk-management perspective, but Barclays expects policymakers to opt for patience in October, waiting for more data to confirm.
Notably, Morgan Stanley reminds that several key variables in this report warrant close tracking: first, Apple raised prices on some older iPhone models by 10% to 14% when it launched new models on September 9, but since smartphones carry only about 0.2% weight in the CPI basket and sampling in some regions is bi-monthly, the direct impact is estimated at no more than 1 to 1.4 basis points; second, whether the room for further airfare increases is approaching a ceiling; and third, whether housing inflation can maintain its current stable pace.
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