The Decisive Significance of Next Week's U.S. CPI: Will the Federal Reserve Hold Off on Raising Interest Rates in October?
Barclays and Morgan Stanley both expect the month-on-month increase in core CPI for September to slow from 0.29% in August to 0.24%, mainly due to a decline in the price increase of wireless communication services. Energy is driving overall inflation, but the marginal core pressure is easing, providing justification for the Federal Reserve to keep rates unchanged in October.
Energy prices are once again dominating the trajectory of inflation, but core pressures are easing at the margin, providing support for the Federal Reserve to stand pat.
The U.S. Bureau of Labor Statistics will release the September CPI data on October 14 (next Wednesday). According to Wind Trading Desk, Barclays and Morgan Stanley predict that headline CPI for September will accelerate due to soaring gasoline prices, but the month-on-month increase in core CPI is expected to narrow slightly compared to August, mainly because the surge in wireless communication service prices is partially retreating. Both institutions forecast a month-on-month increase in core CPI of 0.24%, lower than August’s 0.29%.
This data will directly impact the Federal Reserve’s decision in the October FOMC meeting. Barclays Research believes that despite persistent upward risks to inflation in the near term, Fed officials are likely to keep rates unchanged in October, continue observing incoming data, and defer a 25-basis-point rate hike decision to December.
Minutes from the Fed’s September meeting showed that “most” participants expect one more rate hike this year, but implied no urgency in October. Fed Governor Waller stated that rate hikes do not need to happen at consecutive policy meetings; officials can flexibly time decisions based on economic data. The market has moved its expectations for a rate hike from October to December. Goldman Sachs believes a December hike is more likely, but the possibility that the FOMC ultimately determines no further tightening is equally considerable.
Energy Drives Headline Inflation, Data Surges
Barclays forecasts headline CPI to rise 0.58% month-on-month in September (seasonally adjusted), with year-on-year rising to 3.7%, about 0.3 percentage points higher than August’s 3.4%, though still below the May peak of 4.2%. Morgan Stanley’s forecast is slightly higher at 3.69% year-on-year, and 0.62% month-on-month.
Energy is the main driver behind the jump in headline inflation this time. According to Barclays, the energy component is expected to increase 5.05% month-on-month, with gasoline prices surging 9.23% month-on-month and 34.8% year-on-year; heating oil is up an even greater 38.8% year-on-year.
Morgan Stanley points out that persistent Middle East tensions are an important factor pushing up oil prices, which will further transmit to higher airfare and transportation costs. Barclays’ research team previously warned that rising diesel prices are gradually being passed on to U.S. consumers.
Core Inflation Moderates Slightly, Wireless Communications Retreat Is the Main Reason
While headline inflation is rising, core CPI pressures are easing somewhat. Barclays forecasts the core CPI to rise 0.24% month-on-month and 2.5% year-on-year in September; Morgan Stanley has the same forecast, both falling 5 basis points compared to August’s 0.29%.
The slowdown in core inflation is mainly due to the "Education and Communication" category. In August, wireless communication service prices rose unusually, contributing about 0.1 percentage points to core CPI that month. Barclays expects Verizon’s latest round of price hikes, together with AT&T’s smaller planned increases, to still boost core inflation in September but to a much lesser extent than the previous month.
At the same time, airfares and medical services continue to support core inflation. Morgan Stanley points out that airfares rose 23% year-on-year in August, and they forecast another 1.8% month-on-month increase in September; Barclays forecasts a 2.6% month-on-month rise. Morgan Stanley adds that jet fuel prices have surged nearly 90% year-on-year, and fuel accounts for about 20% to 30% of airlines’ operating costs—this means the price pass-through for airlines is likely almost complete. Additionally, after a weak August, Morgan Stanley forecasts medical services to rebound 0.55% month-on-month in September.
For core goods, Barclays and Morgan Stanley forecast a month-on-month increase in the range of 0.13% to 0.14%, roughly unchanged from August, with prices for new and used cars ticking up slightly.
Housing Inflation Stabilizing, Insurance Drag Persists
The housing component continues to show a steady trend. Barclays forecasts that Owners’ Equivalent Rent (OER) will rise 0.24% month-on-month in September, with primary residence rent up 0.23%; Morgan Stanley projects 0.25% and 0.20%, respectively. Morgan Stanley notes that since May, monthly housing inflation has averaged about 0.24%, slightly lower than the pre-pandemic long-term trend of 0.26%, and is expected to fluctuate around this level in the near future.
Auto insurance continues to drag on core inflation. Morgan Stanley predicts that car insurance premiums will fall 0.20% month-on-month in September and expects this negative trend to persist until 2027, mainly because improved profitability enables companies to lower prices to compete for market share.
As for hotel prices, after two abnormally weak months, August saw a strong rebound; Morgan Stanley forecasts September will return to flat (0% month-on-month).
PCE Inflation Forecast: Expected to Stay Near 3%
CPI data serves as a guide to the Fed’s preferred PCE inflation indicator as well. Barclays predicts September core PCE inflation at 0.22% month-on-month, around 3.0% year-on-year; Morgan Stanley’s forecast is slightly higher at 0.23% month-on-month.
Barclays researchers Pooja Sriram, Marc Giannoni, Jonathan Millar, and Colin Johanson note that PCE prices for financial services are subject to uncertainty, especially as the Bureau of Economic Analysis (BEA) is using a new method to estimate portfolio management service prices, and it may not have timely access to the required nominal expenditure and work hour data, making forecasts more difficult. The team said they will further revise their forecasts after next week’s CPI and PPI data releases.
Fed Policy Path: Pause in October, 25bp Hike in December
In terms of policy, Barclays maintains its base forecast: the Fed will raise rates by 25 basis points in December. The institution notes that mid-to-long-term inflation measures, such as the six- and twelve-month metrics preferred by Chair Powell, are unlikely to improve significantly this year due to base effects, but prospects will improve notably by 2027.
Recent statements from Fed officials suggest that uncertainty around the distribution of inflation outcomes may support further tightening from a risk-management perspective. However, Barclays expects policymakers to take a wait-and-see approach in October, awaiting more data for confirmation.
Worth noting, Morgan Stanley points out several key variables to watch in this report: first, Apple raised prices for some older iPhone models by 10% to 14% when announcing new models on September 9, but since smartphones account for only about 0.2% of the CPI basket—and are sampled only bi-monthly in some regions—the direct impact is expected to be no more than 1 to 1.4 basis points; second, whether there is further room for rising airfare; and third, whether housing inflation can maintain its current stable pace.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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