September CPI Above Target But Within Expectations

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.59% on a non-seasonally-adjusted (NSA) basis in September 2026. On a seasonally-adjusted (SA) basis, the increase was 0.65%. Using NSA figures, energy accounted for 0.275 percentage points (PP) or 47% of the September increase, primarily due to a 9.1% jump in the index for gasoline. Services (excluding energy services) accounted for 0.21 PP or 35.8% of the increase in the CPI-U.

The core CPI-U, which excludes food and energy price changes, rose 0.37% in September, on an NSA basis. On an SA basis, core CPI-U rose 0.33%. The increase in core CPI-U was more broad-based, but the index for shelter costs led the way with a month-to-month increase of 0.35% and a total contribution of 0.121 PP to headline and core CPI-U.

Year-over-year, headline CPI rose 3.7% (NSA and SA), while core CPI rose 2.6% (NSA and SA). Consensus estimates anticipated a 3.6% increase in headline CPI and a 2.5% increase in core CPI.

Even though the actual figures were only slightly above estimates, reports in the business media emphasized the increase in CPI vs. the prior month, trumpeting a month-to-month acceleration in the rate of inflation. Indeed, looking out over the past four months, headline CPI has been on the rise. After falling 0.35% in June and 0.01% in July, headline CPI rose 0.32% in August and 0.59% in September. Much of that can be attributed to gyrations in energy prices, which rose sharply from February to May, before falling in June and July on optimism of a cease fire agreement between the U.S. and Iran. Over the past two months, energy prices have risen as hopes of a potential peace deal have faded.

Core inflation, however, has also proven to be surprisingly sticky. As mentioned, shelter costs have contributed the most to the increase in the CPI. Although the monthly percentage increases in the shelter index have not been all that high, shelter’s high weighting in the CPI – 35.3% of the index – magnifies its impact. The persistence of shelter cost increases is also surprising due to the apparent continuing softening in the housing market following the rise in mortgage rates.

Besides the month-to-month and year-over-year percentage changes, a look at the annualized 3-month percentage change in the CPI sheds light on inflation’s momentum.

To my eye, this chart shows that inflation moderated steadily from the post-Covid surge in 2022 that was driven in large part by supply chain disruptions. That moderation ended abruptly in March 2026 with the start of the U.S.-Iran conflict, which sparked a surge in energy prices as Iran shut down the passage of oil tankers through the Strait of Hormuz. As noted, optimism of an imminent cessation of the conflict and reopening of the Strait caused energy prices (and CPI inflation) to reverse course, which contributed to an easing of CPI inflation early this summer. But inflation rose sharply in September, as hopes of a truce and normalization of traffic through the Strait have faded.

If you cover the right side of the chart above, CPI inflation has gradually but steadily moderated over the past few years, but it has nevertheless remained mostly above the Fed’s 2% target. Recent increases in bond yields in the U.S. and around the world have probably been caused by concerns about widening government budget deficits, especially in the U.S., and the associated higher risk of an acceleration in inflation. On top of this, there are signs – weakness in the housing market, the K-shaped economy, the softening in the labor market, the sharp drop in consumer confidence, etc. – that significant pockets of the U.S. economy are weakening. This, I believe, presents a dilemma for the Fed.

If the Fed holds to its inflation target and continues to raise interest rates to try to bring the rate of inflation down to 2%, it would most likely tip this teetering economy into a recession (and quite possibly a long one). Raising interest rates would also raise the amount of interest paid on U.S. government debt and with it, the Federal deficit and inflation expectations. In 1981, the Fed under Paul Volker chose to raise interest rates sharply to break the back of inflation even though this action caused a sharp but brief recession. Today, the economy is on far less stable footing as the large budget deficit helps keep the economy afloat. With the growing probability of an escalation in the conflicts in Iran and Ukraine, the budget deficit could widen further as military spending increases. Accordingly, engineering a Volker-style recession is not an option available to this Fed. In this environment and given recent developments, a 2% price target does not seem realistic. The best course of action for the Fed would now most likely be to drag its feet in responding to inflation, raising rates only to appease the financial markets, in order to minimize the impact of rising interest payments on the Federal budget deficit.

October 18, 2026

Stephen P. Percoco
Lark Research
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© 2015-2026 by Stephen P. Percoco, Lark Research.   All rights reserved.

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