US September CPI expected to hit 3.7% on energy surge, core steady at 2.4%

Wednesday's CPI report will measure how much the Iran war's energy shock is pushing into US consumer prices. A hot energy component would cement the link between crude oil risk and Federal Reserve policy. Treasury traders are expected to focus on the core figure rather than the headline: a soft core would support the front end of the curve and drag on the dollar, while a firm core could revive October rate hike pricing that dropped after weak payrolls. Gold would likely rise on a soft core and lower yields. With Brent still above $100 and fresh attacks on Saudi infrastructure, energy-driven inflation risks extend beyond this release.

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On the surface, September's CPI data may look alarming, but underneath it could appear calm, leaving the Federal Reserve to choose which narrative to trust.

Key points:

• The September US CPI report is scheduled for Wednesday at 12:30 GMT (8:30 ET), marking the final inflation data before the Fed's October 27-28 policy meeting.
• Headline CPI is forecast to increase 0.6% month-over-month, bringing the annual rate to approximately 3.7% from 3.4%.
• Core CPI is expected to rise about 0.2% for the month, keeping the yearly rate steady at 2.4%.
• Energy prices are estimated to surge about 5.5%, driven by gasoline, while food prices remain subdued.
• The probability of a Fed rate hike in October has dropped to roughly one in four following weak September payrolls, while December remains heavily priced in.
• Federal Reserve Chair Kevin Warsh is slated to speak in Bangkok early Friday, his last publicly scheduled address prior to the meeting.

When September inflation figures come out on Wednesday, US consumer prices are anticipated to record the steepest monthly increase since April, fueled almost wholly by energy, while core price pressures are expected to remain muted.

According to Westpac's calendar, the market foresees headline CPI rising 0.6% in September, accelerating from 0.4% in August. That would push the annual reading to roughly 3.7% from 3.4%, marking a four-month peak. The Cleveland Fed's inflation nowcast aligns with this view, projecting about a 0.5% monthly gain and a 3.6% yearly rate. The data will be released at 12:30 GMT (8:30 ET).

Energy remains the primary driver. Analysts project energy prices will increase approximately 5.5% during the month, spearheaded by gasoline, marking the largest energy contribution since March. As of August, gasoline prices had already climbed more than 27% from a year earlier.

Core inflation, stripping out food and energy, is anticipated to present a quieter picture. Projections indicate an increase of about 0.2%, slower than the 0.3% seen in August, which would hold the annual core rate at 2.4%. The August core reading was lifted by a one-time surge in telephone services due to a methodology change. Analysts expect some volatile components, such as hotel rates and used car prices, to revert. Airfares are an outlier, increasing as higher jet fuel costs are passed on to consumers.

This divergence creates a challenge for the Federal Reserve. The central bank lifted its target range to 3.75%-4.00% on September 16, yet the probability of another rate increase at the October 27-28 meeting dropped to roughly one in four after September payroll data revealed just 29,000 new jobs. Markets continue to price in a December hike. Goldman Sachs had predicted one final increase in October, but that scenario was premised on oil declining toward $85; Brent crude, however, remains above $100.

A strong core print, combined with the energy-boosted headline, would probably reignite bets on an October rate increase, while a soft core would strengthen the case for a December move. Thursday's producer prices and retail sales data will provide additional context ahead of Fed Chair Kevin Warsh's speech at the IMF meetings in Bangkok early Friday, his final scheduled appearance before the meeting.