According to Woofun AI, just after completing the rate hike in September, the Federal Reserve immediately faced an inflation report that made it difficult for policy makers to feel at ease. The core CPI increase remained at 0.3% for the second month in a row, significantly higher than market expectations of 0.2%. This data directly shook the market consensus to “suspend interest rate hikes to observe the effects of early austerity.”
Although overall prices were greatly affected by fluctuations in energy prices, core inflation after excluding food and energy failed to cool down as planned. Instead, it showed greater stickiness, causing the Federal Reserve's policy options at the October meeting to be drastically compressed. Well-known economist Gianluca Benigno clearly stated in the latest analysis that the release of the September CPI data not only strengthened the reasons for further interest rate hikes, but also made the October Federal Open Market Committee meeting a window for potential austerity actions. The focus of market attention has shifted from 'whether to suspend' to 'whether potential inflation is still falling back'.
Judging from the deep disassembly of the data structure, the rebound in core inflation is not due to a single factor, but rather the result of a combination of forces. The core CPI rose 2.6% year on year, not only higher than market expectations of 2.5%, but also rebounded from 2.4% in August; after the seasonal adjustment, it rose 0.3% month-on-month, the same as in August, and exceeded 0.2% market expectations for two consecutive months. Overall CPI rose 3.7% year on year, and rose 0.6% month on month after seasonal adjustment. Among them, gasoline prices rose sharply by 9.1% month on month, contributing more than half of the overall CPI monthly increase, highlighting that energy is still the main force driving up overall prices.
However, the sharp rise in energy prices and the persistence of core inflation have made the policy implications of this report more biased towards austerity. Even with the temporary exclusion of oil price fluctuations, the rate of increase in other consumer prices has not reached the extent expected by the market. The core CPI rose from 2.4% to 2.6% year over year, and this change requires careful interpretation. According to Benigno's calculation, the year-on-year increase without rounding actually rose from about 2.45% to 2.56%, an increase of about 0.11 percentage points rather than the 0.2 percentage point shown on the surface. The low base for the same period last year amplified changes in year-on-year readings, so it is impossible to assume that core inflation has suddenly accelerated sharply based on rising published values alone. What really affects policy judgments is the monthly trend: the expected slowdown in market expectations did not occur, and the 0.3% month-on-month increase in core CPI reappeared. Although this is not enough to confirm a new upward cycle of inflation alone, it means that the Federal Reserve still lacks evidence that it can safely suspend interest rate hikes.
Data compiled by Woofun AI shows that under the combined effects of energy shocks and base effect, the month-on-month resilience of core inflation has become a key variable limiting policy shift. Any strategy that tries to confirm that inflation falls back on its own by waiting seems unfounded in the current data environment.
In terms of structural pain points, the stagnation of housing inflation and the strengthening of non-housing service prices constitute the main sources of core inflation stickiness. Previously, the gradual decline in housing inflation was seen as an important force driving core inflation to continue to decline, but this process came to a standstill in September. The year-on-year increase in housing prices rose from 3.0% in August to 3.2%, and the month-on-month increase after seasonal adjustment rose from 0.3% to 0.4%, contributing about half of the month's core CPI increase. Among them, landlords' equivalent rents — that is, estimating the value of rental services that can be provided by their own homes — rose from 0.2% to 0.3% month-on-month; the increase in rent for major residences remained at 0.2%.
The year-on-year strengthening of housing was partly affected by the low base, but the month-on-month acceleration after the seasonal adjustment indicates that the price trend has indeed changed recently. For the Federal Reserve, this means that it was expected to continue to lower the core inflation segment, but it has not been able to play the expected role for the time being. In addition to housing, service prices have also remained resilient. Excluding housing, the price of core services is commonly known as the “super core” service price. The year-on-year increase rose from 3.1% to 3.2%, and remained at 0.3% month-on-month after seasonal adjustment. Transportation services rose 0.6% month-on-month, with air tickets rising 1.2%; hospital services and education services rose 0.7% and 0.6%, respectively. Benigno believes that higher prices for transportation services suggest that higher energy costs may begin to be transmitted to the prices of some services.
However, there are different price drivers for health care, education, and housing, and not all of these increases can be attributed to oil prices. The commodities sector has retained some relatively mild signals. Core commodity prices rose 0.7% year on year in September, the same as in August; the year-on-year increase of clothing fell from 3.6% to 3.4% year over year. Although the month-on-month increase in core commodities rose from 0.1% to 0.3% after the seasonal adjustment, there is no sign of a general acceleration in the year-on-year increase.
This means that the current more accurate description is that the stickiness of core inflation has increased, and not all sectors have entered comprehensive price increases. The difficulty at the policy level is that energy pressure has not subsided, and housing and other services have not provided sufficient cooling power.
At the policy deduction level, the Federal Reserve raised interest rates by 25 basis points at the September meeting to raise the federal funds rate target range to 3.75% — 4.00%. All 12 voting members supported this decision. At the same time, the policy statement pointed out that economic activity is expanding steadily, domestic spending remains resilient, and inflation is still high. Against this backdrop, the September CPI actually examined a question: can potential inflation continue to slow, providing a basis for the Federal Reserve to suspend action and observe the effects of earlier austerity? The report did not give the expected support. The core CPI did not fall month-on-month, and housing and non-housing services strengthened, weakening the argument that “we can continue to wait after the September rate hike”.
However, no single report can measure the full effect of the previous interest rate hike; the transmission of monetary policy to demand and prices takes time. Benigno's judgement favors further austerity. According to his understanding of the Federal Reserve's response function, policymakers will also consider how long inflation remains above target, the resilience of the economy and employment, and whether financial conditions are sufficient to constrain demand.
If the economy remains stable, the labor market does not weaken significantly, and inflation in core services continues to be strong, the reasons for the Federal Reserve to raise interest rates further will increase. Conversely, if subsequent data clearly cools down, or financial conditions are clearly tightened, there is still a basis for suspending observation. There is also a need to distinguish indicators here: the Federal Reserve measures its 2% inflation target using the PCE price index. The core CPI is an important reference, and the gap between this and 2% cannot be mechanically converted into the number of interest rate hikes. For the October 27-28 meeting, next we need to look at producer prices, inflation expectations, employment, and financial conditions. Among them, whether housing and non-housing services can slow down again will affect the Federal Reserve's judgment on the continuation of price pressure. The September CPI hasn't made the October rate hike a foregone conclusion, but it raised the evidentiary threshold required to suspend interest rate hikes. With core inflation not cooling down as scheduled, if the Federal Reserve chooses to continue waiting, it will need to find more convincing reasons from other data. This is another sign that the market's differences over the policy path have intensified after aggressive interest rate hikes in September.