September brought little relief from the accelerating cost of living as consumer prices rose again and kept the inflation rate well above the Federal Reserve’s target.
The consumer price index, a broad measure of the costs of goods and services across the U.S. economy, rose a seasonally adjusted 0.6% for the month, bringing the 12-month rate to 3.7%, the Bureau of Labor Statistics reported Wednesday. Economists surveyed by Dow Jones expected gains of 0.6% and 3.6% respectively.
Excluding volatile food and energy costs, the so-called core CPI rose 0.3% on the month and 2.6% on an annual basis, compared to respective estimates of 0.2% and 2.5%.
The annual rate of headline inflation was 3.4% in August, while the underlying rate was 2.4%.
Rising energy costs were once again the main cause of inflation. The energy index jumped 5.2% as tensions continue between the United States and Iran in a war launched in late February that shows no signs of ending anytime soon.
Gasoline prices rose 9.1%, accounting for about half of the increase in the overall CPI, according to the BLS. Over the past year, gas rose 34.2% while fuel oil rose 74.2%.
Food prices remained stable over the month and up 2.5% compared to last year. However, housing prices rose 0.4% and used car and truck prices jumped 0.7%. Clothing prices, sensitive to customs duties, increased by 0.3% and are up 3.4% on an annual basis.
Stock market futures turned negative after the release, while bond yields were significantly higher. Futures traders also increased the odds of a rate hike at the next Federal Open Market Committee meeting on Oct. 27-28 to about 54%, according to CME Group’s FedWatch tool. The odds of a rate hike before the end of the year have increased to more than 96%, with a nearly 50-50 chance of a half-percentage-point hike.
This is the last CPI reading that FOMC officials will get before this meeting. The BLS will release the September figure for the producer price index, a measure of wholesale costs, on Thursday.
“Core inflation reached an annualized rate of 3.7% in September and 3.2% over three years,” said Sonu Varghese, chief macroeconomic strategist at Carson Group. “The only surprise is that investors continue to be surprised by widespread inflation. And we have yet to see the full impact of rising diesel prices and the AI boom.”
Inflation measured by the CPI has exceeded the Fed’s 2% benchmark since March 2021. The indicator was trending downward in early 2026, but then climbed following strikes launched by the United States and Israel against Iran.
In recent months, the year-over-year trend has moderated, but remains well above target.
Fed officials responded in September by approving their first interest rate hike in more than three years, a quarter-percentage-point move that brought the benchmark funds rate to a target range of 3.75% to 4%. Markets expect the Fed to skip an increase in October but hike again in December.
The types of supply shocks that caused the energy surge are generally considered temporary, and policymakers often ignore them when thinking about how to set prices. However, Fed officials worry that the longer the war drags on, the more likely it is that the rise will spread throughout the economy and become entrenched in the expectations of consumers and businesses.
Prices have also been pressured by tariffs imposed by President Donald Trump as well as demand for goods associated with the development of artificial intelligence.
In recent days, a number of key policymakers have expressed the belief that the Fed does not need to rush to implement another hike. However, most say they expect another increase this year. Market prices imply that the Fed could raise rates at least twice more in 2027.
Fed officials track the CPI and a host of other indicators, but use the Commerce Department’s Personal Consumption Expenditures Price Index as their primary indicator for forecasting and setting policy. PCE figures for September won’t be released until later this month.
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