The September CPI report, delayed for more than two weeks, was finally released this morning. The September Inflation data is an important number used to calculate the 2026 Social Security cost-of-living (COLA) adjustment; COLA is now set to increase 2.8% for 2026 (a slight uptick from 2.5% in 2025).
September CPI Recap
CPI rose 0.310% in September, and the core rose 0.227%, both a tenth less than expected. A 1.5% rise in energy prices, the biggest since December of last year, added a tenth to the headline rise. YoY CPI inflation rose from 2.993% to 3.023%. The YoY core rate fell from 3.112% to 3.026%. It was the first drop in the core rate of inflation since May.
The story of the report was the improvement in OER (Owner’s Equivalent Rent), which printed at 0.1% (0.137% unrounded) after a steamy 0.38% print in August, and is the lowest since early 2021. After many false starts, it looks as if OER will help to bail out higher goods and service prices.
Another inflation variant we monitor is the Supercore CPI, which is defined as core services excluding housing. Supercore rose 0.4% in September, marking an acceleration from the 0.3% gain the month prior and the largest monthly increase since July. Over the past 12 months, the Supercore increased 3.2%, marking the smallest annual gain since June.
Goods vs. Services
Notables
Core Goods Rose 0.2%
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- Apparel rose 0.7%
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- New vehicles rose 0.2%
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- Used vehicles fell 0.4%
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- Medical care commodities fell 0.1%
Core Services Rose 0.2%
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- Shelter rose 0.2%, with the OER up 0.1%, its smallest increase since January 2021
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- Medical care services rose 0.3%, including a 7.0% rise in elder care at home, the largest increase ever
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- Transportation services rose 0.3%, including a 2.7% rise in airfares
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- Financial services fell 1.5%
Bottom Line
Core CPI came in slightly lower than expected (large decline relative to August), predominantly due to weaker shelter inflation. OER had its lowest print in about 4 years. Core Goods continue to offer relief versus fears (tariff-related). Goods inflation hasn’t materialized into the inflation shock that economists (academia) feared. On top of that, energy prices, shelter inflation (especially real-time data), and a slowing labor market all point towards continued disinflationary forces.
As “data-dependent” Fed officials wait for data confirmation, inflation data should help push them over the edge. While the Fed did not need evidence of subsiding inflation to justify a cut next week, it can’t hurt and will make it easier to cut again in December, even if there are no more government data releases between now and then.
The market is pricing in two rate cuts for the remainder of the year. Given the Fed’s shift towards focusing on labor and evidence of softening price pressures, those cuts in 2025 seem all but certain. As we move into 2026, the durability of the rate cut cycle comes into question. The market is pricing roughly 3 more cuts next year (for a total of 5 cuts), which would bring the Fed Funds rate to ~3%.
As loosening monetary policy makes its way through the system (with a lag), we do fear the economy could reaccelerate while other factors, such as energy prices, bottom out and push higher, potentially creating another bottom in inflation data. As the Fed discontinues Quantitative Tightening (QT), we expect that to serve as another mechanism of financial easing (we’ve read equivalent to another 25bps cut).
Additionally, stimulus from the “One Big Beautiful Bill” (OBBB) on the consumer side is set to hit in early 2026 to the tune of $150bn. Stack on top of that a durable move lower in mortgage rates, and you could see a solid backdrop for an improvement in consumer sentiment and, in turn, spending.
On the other hand, with inflation expectations still looking anchored, we are not too worried about runaway inflation here despite the potential of lingering tariff effects. More than anything, it appears 3% inflation is the new 2% inflation.
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