America’s inflation rate reached a three-and-a-half-year low in September, slowing to a pace similar to what was last seen in 2017 and 2018. The Consumer Price Index (CPI) rose 2.4% for the 12 months ending in September, down from 2.5% in August, according to the Bureau of Labor Statistics (BLS). Despite the continued slowdown, the data presents a mixed picture for the Federal Reserve as some stubborn price pressures and economic risks could complicate the disinflationary path.
Inflation Eases, But Stubborn Price Pressures Persist
While inflation continued to ease in September, the 0.2% monthly increase was above economists’ expectations, which projected a 0.1% rise. The core CPI, which excludes food and energy costs, rose by 0.3%, increasing the annual core inflation rate to 3.3% from 3.2%. According to Olu Sonola, head of U.S. economic research at Fitch Ratings, high inflation is “dying, but not dead,” reflecting the ongoing challenges in bringing inflation fully under control.
The September data revealed areas where inflation remains sticky. For instance, food prices jumped due to a sweeping bird flu outbreak that caused an 8.4% surge in egg prices, leaving egg costs 39.6% higher than a year ago. Shelter costs, which account for over a third of the CPI, continued to show resilience but slowed to a 4.9% year-over-year increase, the lowest since February 2022.
Housing Costs Show Signs of Cooling
Shelter inflation has been the largest hurdle in taming price growth, but the latest report provided a glimmer of hope. Monthly shelter costs rose just 0.2%, signaling a possible moderation in housing-related inflation. Tyler Schipper, associate professor of data analytics and economics at St. Thomas University, described shelter as “the silver lining” in the latest CPI data, noting that while it’s only one data point, it suggests that the Fed’s efforts to slow inflation are making progress.
The lag in how rents and housing costs are measured means that the effects of recent cooling in the housing market have yet to be fully reflected in inflation data. Economists believe that as these delayed metrics catch up, the slowdown in shelter inflation could become a significant driver in reducing overall inflation.
Energy and Food Prices: Persistent Risks Ahead
Even as inflation appears to be moving in the right direction, economists caution that future risks remain, particularly in energy and food prices. Satyam Panday, chief economist at S&P Global Ratings, warned that “energy prices are a key risk” to the disinflationary trend, as geopolitical tensions, natural disasters, and policy changes could drive prices higher in the coming months.
The September report also highlighted the ongoing effects of external factors on inflation. Egg prices soared due to bird flu, while hurricane disruptions and strike-related effects could further complicate the outlook. These risks underscore that while inflation is easing, the path to price stability may be uneven.
Mixed Implications for the Federal Reserve
September’s CPI report presents a complex scenario for the Federal Reserve as it prepares for its next policy meeting. The slowdown in shelter costs provides some good news for the central bank, as high housing inflation has been a persistent drag on its efforts to cool prices. However, the continued rise in core inflation and the risks posed by external shocks suggest that the Fed must remain cautious.
Eugenio Aleman, chief economist at Raymond James, pointed out that while “September’s CPI report has good news and bad news for the Fed,” there are still “plenty of upside risks for inflation going forward.” The mixed data could lead the Fed to adopt a wait-and-see approach as it evaluates whether to proceed with another rate cut.
Inflation’s Trajectory Over the Decades
Inflation has taken a bumpy path over the past half-century. From 1970 to September 2024, the CPI rose at an average annual rate of 4%, but in the decade before the pandemic (2010-2019), it averaged just 1.8%. The rapid rise in inflation during the pandemic era was driven by a combination of factors including supply chain disruptions, strong demand, and unprecedented government spending. These drivers have largely faded, allowing inflation to gradually return to more familiar territory.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted that most of the forces that drove inflation higher, such as commodity price spikes and strong consumer demand, “have pretty much faded or are falling quite rapidly.” Still, he cautioned that idiosyncratic risks could cause temporary price spikes in certain categories.
Economic Risks Could Derail the Disinflation Trend
The outlook for inflation has improved, but economists warn that several factors could disrupt the progress. With the presidential election nearing, economic policies could shift dramatically depending on the outcome. Former President Donald Trump’s campaign has shifted its focus away from inflation in recent weeks as the data shows easing price pressures. However, his proposed policies, including the imposition of new tariffs, could introduce new inflationary risks if he returns to office.
Additionally, the effects of recent hurricanes, labor strikes, and potential geopolitical flare-ups could put upward pressure on prices. The October jobs report, due on November 1, will provide crucial insights into the state of the labor market, another factor the Fed is closely monitoring as it determines its next steps.
What’s Next? Key Data to Watch
The September CPI report was the last inflation snapshot before the November presidential election and the Fed’s next policymaking meeting. Additional data releases, including the Producer Price Index (PPI) on Friday and the Personal Consumption Expenditures (PCE) price index at the end of the month, will further inform the outlook for inflation.
The PCE index, the Fed’s preferred inflation gauge, offers a broader view of price changes across the economy and could be critical in shaping the central bank’s decision-making. Meanwhile, the October jobs report will be scrutinized for signs of strength or weakness in the labor market, especially in light of recent disruptions.
September’s inflation report indicates that while U.S. inflation is slowing, significant challenges remain on the path to price stability. With risks from energy, food prices, and potential policy changes looming, the Federal Reserve faces a delicate balancing act in its efforts to maintain economic growth while controlling inflation. As new data emerges, the central bank’s next steps will be critical in determining whether inflation continues its downward trend or faces renewed pressure.
