U.S. inflation likely cooled in September due to falling energy prices, giving the Federal Reserve breathing room to potentially pause its aggressive interest rate hikes aimed at taming surging consumer costs.
The consumer price index rose just 0.3% last month after surging 0.6% in August, according to economists polled by Bloomberg. On an annual basis, headline inflation likely eased to 3.6% from 3.7% in August.
The moderation was driven largely by energy costs. After skyrocketing over 5% in August, energy prices likely rose a mere 0.4% in September as oil prices cooled amid economic uncertainty. At the pump, retail gasoline prices were little changed from August, providing relief to consumers.
Food prices, however, continued their uphill climb. Grocery costs jumped 0.2% last month and 4.3% over the past year, squeezing household budgets. Supply chain disruptions and elevated transportation costs contributed to the food inflation.
Stripping out food and energy, core consumer prices probably rose 0.3% in September, matching the August pace. Annually, core inflation likely ticked down to 4.1% from 4.3% – still well above the Fed’s 2% goal but moving in the right direction.
Used Cars Provide Respite
The core slowdown was driven in part by an easing in used car prices. After falling 1.2% in August, used vehicle costs likely dropped again in September as supply chain issues abated.
“This could be the last significant decline in used car prices in the near-term as wholesale prices increased modestly in August and more significantly in the first half of September,” said Bank of America economist Michael Gapen in a note.
Elsewhere in core goods, price increases moderated outside of the volatile used car category. But services inflation continued unabated, with airfares, lodging, shelter, rent and healthcare costs seeing upward pressure.
Wage Growth adding to Inflation
Lingering labor shortages have pushed wages higher as businesses compete for workers, contributing to inflation through higher production costs. Average hourly earnings rose 5.7% in August from a year earlier.
While job growth is slowing and layoffs have ticked up in interest rate-sensitive sectors like housing and tech, the labor market remains tight overall. The unemployment rate was just 3.5% in September, near a 50-year low.
“Wage growth and the tight labor market are inconsistent with 2% inflation,” said Gapen. “We continue to expect inflation will fall gradually and in fits and starts.”
Fed Debates Policy Path
The moderating inflation print comes as the Fed debates how much further to raise interest rates to cool the economy and tamp down inflation.
After four consecutive 75 basis point hikes, markets expect the central bank to downshift to a 50 basis point increase at its November meeting. But hawkish Fed officials argue forceful action is still needed to wrangle inflation back down to the 2% target.
Dovish policymakers contend the cumulative rate hikes are beginning to slow the economy and caution against overtightening. They advocate for smaller 25 basis point steps going forward.
“Should the print come in as we expect or above our expectations, it would keep a November hike in play,” said Gapen. But above-target inflation, solid wage growth and wholesale price pressures suggest the Fed’s battle against rising consumer costs is far from over.
Markets are betting the Fed will hit pause after November as the risk of recession rises. But stubbornly high inflation may keep central bankers on their aggressive hiking path into 2023.