Inflation Overshot Expectations in September

The Week Ahead

The economic calendar will be relatively light in the lead up to the October Fed decision. House price indexes likely rose in August but lagged CPI inflation year over year. Regionally, price increases will likely be strongest in Midwest and Northeast metros that have added relatively little housing supply since the pandemic, and coolest in the Sunbelt metros where builders concentrated new construction in recent years, and also in the Pacific Northwest, where weak tech industry hiring is a headwind.

House price increases gained momentum in mid-2026 as a booming stock market swelled household wealth, but may take a breather in coming quarters if the run-up in mortgage rates since mid-September persists.

The two most closely followed U.S. consumer surveys will likely edge lower in their October releases, shortly before the next Fed meeting. Energy prices, inflation, rising interest rates, and the Iran War are weighing on consumer attitudes, as is pessimism about the job market.

Last Week in Review

Inflation surprised to the upside in September. Headline CPI matched expectations for the month, accelerating to 0.6% from 0.4% on a 9.1% jump in gasoline prices. The negative surprise was in core prices, which rose a faster-than-expected 0.3%. Price increases were widespread across the core CPI basket, affecting a range of durable goods, nondurables, and services.

The PPI rose even more than the CPI, up 1.3% versus the 0.6% expected. Diesel surged a seasonally adjusted 21.0%. Producer prices for foods rose 1.2% on double-digit increases of fresh and dry vegetables, hay and hayseeds, grains, and oilseeds—rising prices of livestock feeds will likely translate to more expensive meat in 2027. Core PPI excluding food and energy rose 0.7% as trade services (Wholesale and retail margins) climbed 1.4% and energy-intensive transportation and warehousing charges jumped 3.4%. A silver lining is that many of the core PPI components that carry over into PCE inflation behaved better than the headline. These include portfolio management services, most medical services, and pharmaceuticals.

Headlines were strong for the first September activity data, but the details were uneven. Retail sales rose a strong 0.8% on a 6.4% increase in gas station spending (All due to higher prices—recall gas prices jumped 9.1% in the CPI report). Other retail categories rose 0.2%, lagging the 0.3% increase of CPI core goods prices.  Industrial production rose 0.7% as utilities output jumped 3.5%. This was the hottest September on record, boosting cooling demand. Manufacturing rose a more moderate 0.3% after declining 0.2% in August.  

The federal deficit was $1.99 trillion in the 2025-2026 fiscal year, up 12% from the prior year and well ahead of nominal GDP’s 6% year-over-year increase in the latest quarterly report. Federal outlays grew by 5.5% and receipts by 3.2%.