Wednesday's U.S. consumer price report is shaping up as the biggest event of the week for markets, and the story going in is pretty clear: energy will drive the headline higher, but everyone's really watching what happens underneath. The September CPI is due at 8:30 a.m. Eastern (12:30 GMT).
According to a survey of 14 forecasters compiled by The Wall Street Journal, the median expectation is for headline CPI to rise about 0.6% month over month, up from 0.4% in August. That would push the annual rate to 3.6% from 3.4%. Core CPI, which strips out food and energy, is expected to rise about 0.22%, slower than August's 0.29%, leaving annual core inflation steady at 2.4%. Some previews put headline closer to 3.7%.
Gasoline is doing the heavy lifting. U.S. pump prices averaged above $4.30 a gallon in September, a record for that month, as the war involving Iran keeps crude prices elevated. Headline forecasts are tightly grouped, with Morgan Stanley at the high end and JPMorgan slightly below the pack.
The core outlook is far less settled. Deutsche Bank has the softest forecast at 0.16%, with Citigroup and JPMorgan both at 0.18%, while Goldman Sachs, Barclays and Morgan Stanley are at the top end with 0.24%. Forecasters are split almost evenly on whether annual core holds at 2.4% or ticks up to 2.5%. Part of the expected cooling is a one-off: Barclays and Morgan Stanley note that an unusual jump in wireless phone service prices added roughly 0.1 percentage point to August's core reading, and that should partly unwind.
Why does that tiny difference matter so much? Because it maps directly onto the debate inside the Fed. On Tuesday, Boston Fed President Susan Collins said she's watching how widespread price pressures are and repeated her support for another hike before year-end, while Richmond Fed President Tom Barkin said inflation is proving persistent. On the other side, New York Fed President John Williams said the economy isn't overheating and that he sees no need for hikes in 2027. A core print at the top of the range, around 0.24% or higher, would strengthen the hawks and firm up expectations for a December hike, likely lifting short-term yields and the dollar. A soft reading near 0.16% to 0.18% would support Williams' view that inflation is being driven by specific shocks.
There's also a measurement wrinkle worth keeping in mind. Core CPI has recently been running below core PCE, the Fed's preferred inflation gauge, which stood near 3% in August. So even a benign core CPI number may make inflation look a little better than the measure the Fed actually targets.
The Fed's Beige Book follows later on Wednesday, ahead of the October 27-28 policy meeting, where markets currently expect the central bank to hold before hiking in December. With the 10-year Treasury yield already above 5.2% and stocks trading near record highs, the CPI data could set the tone for currencies, bonds and equities for the rest of the month.