Goolsbee labels CPI 'discouraging'; Beige Book flags diesel-driven price pressures

The two reports together increase the likelihood of a rate hike in October. Markets see nearly a 40% chance of a move at the October 27-28 meeting, even though key policymakers had pointed to December. Central to this is oil: diesel costs from the Iran conflict now affect freight, farming and airfares, raising the risk of second-round effects the Fed cannot easily ignore. That bolsters front-end Treasury yields and the dollar, and puts upward pressure on mortgage rates. Further gains in crude or diesel would strengthen the case for an earlier move. Fed commentary next week, before the pre-meeting blackout, will test whether officials resist October pricing.

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A Fed president hears about costs wherever he goes, while the Fed's survey indicates businesses are even more focused on diesel.

Key points:

• Chicago Fed President Austan Goolsbee described the September CPI as discouraging, noting that services inflation above 5% cannot be attributed to tariffs or oil.
• He did not specify a near-term policy response, but emphasized that the Fed must prevent demand-driven overheating from building.
• The Fed's Beige Book indicated price growth was accelerating in some regions, with three districts describing it as robust.
• Diesel costs appeared 21 times in the Beige Book, up from two in the prior report, and were the most frequently cited cost driver among Dallas Fed contacts.
• The labor market remained in a low-hire, low-fire state, with housing constrained by mortgage rates near three-year highs.
• Markets now see close to a 40% chance of a rate hike at the October 27-28 meeting, after headline CPI increased 3.7% year-over-year.

On Wednesday, two Fed releases suggested inflation pressure is spreading instead of easing, just after U.S. consumer price data exceeded forecasts. Chicago Fed President Austan Goolsbee called the September figures discouraging, and the Beige Book survey showed price growth strengthening in some regions, increasingly driven by diesel costs.

The 12-month consumer price increase through September was 3.7%, significantly above the Fed's 2% goal and faster than economists had predicted. Much of that strength came from higher gasoline costs tied to the Iran conflict, while increases in software and toy prices reflected AI demand and tariffs.

In an interview with Yahoo Finance, Goolsbee expressed concern about both the headline CPI and the details. Services inflation, he noted, had shown barely any improvement and was above 5% in the latest data, a component not attributable to tariffs or oil. He said that throughout the Midwest, he heard talk of costs and prices but little that pointed to a downturn or recession risk. In his opinion, this makes demand-side overheating more worrisome than a pure supply shock.

Goolsbee did not specify a near-term Fed response. However, he stated that the central bank's task is clear if inflation remains high: it must prevent overheating from accumulating, since demand-driven inflation is typically persistent and difficult to reverse. He affirmed that the Fed will bring inflation back to 2%.

The Beige Book, a compilation of business commentary from the 12 regional Fed banks, echoed those worries. Three districts called price growth robust, eight described it as moderate — with three of the eight saying it was accelerating. Diesel fuel costs were mentioned 21 times, compared with two times in the prior report and zero in surveys taken just before the U.S.-Israeli war with Iran started in late February. Dallas Fed contacts cited diesel as the most common cost driver, affecting freight, farming and airfares, and compressing margins across industries. Contacts also noted pressure from other commodities, tariffs and insurance.

The labor market was still in a low-hire, low-fire state. Multiple districts noted a lack of mass layoffs, but five said companies were reducing staff by not replacing workers who left or by delaying new hires. Several also reported cost-of-living pressures translating into wage demands. Artificial intelligence also appeared: one business services firm told the Chicago Fed that AI productivity improvements enabled it to cut headcount through attrition.

Housing was a notable weak point. Rising mortgage rates, approaching three-year highs, drove buyers out of the market and discouraged existing owners from relocating. Trade tensions with Canada were mentioned as a drag on manufacturing and tourism in four districts. The survey data were gathered on or before October 5.

The Fed increased its target range by 25 basis points in September to 3.75%-4% and signaled one additional increase this year. Senior officials have downplayed a move at the October 27-28 meeting, pointing instead to December, but markets now price in a near-40% chance of a hike this month.