Inflation eased slightly in September, the Bureau of Labor Statistics (BLS) reported late last week, after a delay in the release due to the government shutdown. The Consumer Price Index (CPI) rose 0.3 percent last month, down from 0.4 percent in August. On a year-over-year basis, headline inflation ticked up slightly to 3.0 percent, compared with 2.9 percent in August.
Core inflation, which excludes volatile food and energy prices, rose 0.2 percent in September, down slightly from 0.3 percent in August. On a year-over-year basis, it ticked down from 3.1 percent in August to 3.0 percent last month.
Gasoline was the main driver of inflation last month. Gasoline prices rose 4.1 percent in September, after rising 1.9 percent in August. Overall energy prices climbed 1.5 percent.
Food prices, in contrast, rose just 0.2 percent in September, which was less than half the change observed in August. Prices for food at home increased 0.3 percent, while food away from home rose 0.1 percent. Both grew more slowly in September than in the previous month.
Most components of core CPI declined last month, with the notable exceptions of apparel and medical care.
While inflation is currently much lower than it was for much of 2021, 2022, and 2023, newly imposed tariffs have caused prices to rise more rapidly in recent months. Inflation averaged 0.3 percent per month in July (0.2 percent), August (0.4 percent), and September (0.3 percent), which is equivalent to a roughly 3.7 percent annual rate. That is well above the year-over-year figure of 3.0 percent.
Recent core CPI data tell a similar story. Core prices rose 0.3 percent in July, 0.3 percent in August, and 0.2 percent in September — an average monthly rise of roughly 0.3 percent, which is again equivalent to a roughly 3.7 percent annual rate. Hence, core inflation has risen faster in recent months compared to its year-over-year pace, as well.
Although the Fed officially targets the personal consumption expenditures price index (PCEPI), CPI data provide timely and relevant information for policymakers. The two measures generally track each other closely, though CPI tends to overstate inflation relative to the PCEPI. That makes the latest CPI readings a useful (if slightly higher) measure for Fed officials — and, hence, for determining how those Fed officials will likely conduct policy.
The fact that recent inflation is running hotter than its year-over-year pace is not altogether unexpected. The consensus view is that tariffs are likely to result in a one-time increase in the price level. If Fed officials accept that view, they will likely go through with the widely-expected rate cut this week, despite both headline and core inflation exceeding the 2 percent target.
According to the CME Group’s FedWatch tool, markets are assigning a 96.7 percent probability to an October rate cut. Last week’s CPI release appears to have had little effect on expectations: the implied odds of a 25-basis-point cut were over 98 percent on Thursday and have remained in the high 90s since the Fed’s September meeting.
The Fed was slow to act when inflation first accelerated. It should avoid making the opposite mistake now. Although policymakers cut rates last month, monetary policy remains restrictive.
Some officials may be tempted to pause this week. They should remember that tariffs, not excessive money growth, are the main driver of recent inflation. Rather than risk overcorrecting, the Fed should stay the course and cut rates again. Failing to do so would mean falling behind the curve once more—this time by allowing overly tight policy to push the economy into a needless recession.