US September inflation at 3.0%; amid shutdown concerns

27 Oct 2025 , 08:59 AM

SEPTEMBER US CPI INFLATION EDGES UP 10 BPS TO 3.0%

Since April, the US CPI inflation is up a full 70 bps from 2.3% to 3.0%. Compared to the Fed target of 2.0%, the US consumer inflation is now a full 100 bps higher. Much of the pressure (as expected) has come from the steep tariffs on specific countries like India and China. There is one more thing of importance to remember in the current inflation announcement, which is the last big data point ahead of the Fed policy statement next week.

The US economy has been in the midst of a shutdown of all non-essential services since 01-October 2025. Data collection, being classified as one of the non-essential services, led to a 2 weeks delay in the announcement of the CPI inflation. At the same time, it is not too clear if these data points are entirely reliable due to the limited time and bandwidth available. Effectively, the Fed will be taking a rate decision on inadequate data, this time around!

ENERGY INFLATION SURGES; AS FOOD AND CORE INFLATION TAPER

The month of September saw hardening of fuel inflation, bearing the direct brunt of the steep tariffs. However, food and core inflation edged lower by 10 bps each.

Inflation Basket Category	Sep 2025 (YOY)	Aug 2025 (YOY)	Inflation Basket Category	Sep 2025 (YOY)	Aug 2025 (YOY)
Food Inflation	3.10%	3.20%	Core Inflation	3.00%	3.10%
Food at home	2.70%	2.70%	Commodities less food and energy	1.50%	1.50%
·          Cereals and bakery products	1.60%	1.10%	·          Apparel	-0.10%	0.20%
·          Meats, poultry, fish, and eggs	5.20%	5.60%	·          New vehicles	0.80%	0.70%
·          Dairy and related products	0.70%	1.30%	·          Used cars and trucks	5.10%	6.00%
·          Fruits and vegetables	1.30%	1.90%	·          Medical care commodities	0.70%	0.00%
·          Non-alcoholic beverages	5.30%	4.60%	·          Alcoholic beverages	2.00%	1.90%
·          Other food at home	1.90%	1.50%	·          Tobacco and smoking products	6.90%	6.30%
Food away from home	3.70%	3.90%	Services less energy services	3.50%	3.60%
·          Full service meals and snacks	4.20%	4.60%	Shelter	3.60%	3.50%
·          Limited service meals	3.20%	3.20%	·          Rent of primary residence	3.40%	3.50%
Energy Inflation	2.80%	0.20%	·          Owners’ equivalent rent	3.80%	4.00%
Energy commodities	-0.40%	-6.20%	Medical Care Services	3.90%	4.20%
·          Fuel oil	4.10%	-0.50%	·          Physician Services	2.40%	3.50%
·          Gasoline (all types)	-0.50%	-6.60%	·          Hospital Services	5.50%	5.80%
Energy services	6.40%	7.70%	Transport Services	2.50%	3.50%
·          Electricity	5.10%	6.20%	·          Motor vehicle Maintenance	7.70%	8.50%
·          Natural gas (piped)	11.70%	13.80%	·          Motor vehicle insurance	3.10%	4.70%
Headline Consumer Inflation	3.00%	2.90%	·          Airline Fare	3.20%	3.30%

Data Source: US Bureau of Labor Statistics

CPI inflation sets the tone for PCE inflation to be announced later next week; which actually influences the Fed rate decisions. Here is a quick comparison of the key inflation heads.

• August food inflation was down 10 bps at 3.1%. Upward pressure came from cereals, bakery products, and non-alcoholic beverages. This was more than offset by fall in dairy products, meat, fish, eggs, fruits, and vegetables. Food away from home turned cheaper.
• Energy inflation applied the big upward pressure to the inflation basket. There was downward pressure from services like electricity and natural gas supply. This was more than offset by a spike in energy commodities like fuel oil and gasoline.
• September Core inflation saw upward pressure from tobacco products, medical care commodities, and shelter. This was more than offset by a fall in used cars, physician services, hospital services, vehicle maintenance, motor insurance, and air fares.

In energy and core inflation, the pressure has come from the commodities, while the softening is seen in the services space.

SEPTEMBER 2025 MOM INFLATION EASES TO 0.3%

Here is the high frequency month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%
May 2025	0.3%	-1.0%	0.1%	0.1%
Jun 2025	0.3%	0.9%	0.2%	0.3%
Jul 2025	0.0%	-1.1%	0.3%	0.2%
Aug 2025	0.5%	0.7%	0.3%	0.4%
Sep 2025	0.2%	1.5%	0.2%	0.3%

Data Source: US BLS (negative figures in brackets)

High frequency inflationary trend is almost similar to the trend we see on yoy inflation. The MOM core inflation is marginally lower while the MOM food inflation is sharply lower. However, this has been more than offset by the doubling in the MOM energy inflation.

CME FEDWATCH – WILL OCTOBER SEEN ANOTHER RATE CUT?

The September Fed meet saw an almost unanimous decision to cut rates by 25 bps to the range of 4.00%-4.25%. That was in line with the promise made by Powell at Jackson Hole. However, in subsequent speeches, Powell has hinted at a shift in focus of the FOMC from inflation and price stability towards maximum employment. That opens up the gates for more rate cuts in the remainder of 2025 and also in 2026. Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look.

Fed Meet	175-200	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	98.3%	1.7%
Dec-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	91.1%	8.8%	0.1%
Jan-26	Nil	Nil	Nil	Nil	Nil	Nil	50.4%	45.5%	4.0%	0.1%
Mar-26	Nil	Nil	Nil	Nil	Nil	25.8%	47.9%	24.3%	2.0%	Nil
Jun-26	Nil	Nil	Nil	3.9%	20.8%	37.2%	28.5%	8.8%	0.6%	Nil
Sep-26	Nil	0.4%	4.0%	15.1%	29.0%	30.3%	16.7%	4.2%	0.3%	Nil
Dec-26	0.2%	1.7%	7.5%	19.1%	29.0%	26.1%	13.1%	3.1%	0.2%	Nil
Mar-27	0.3%	2.1%	8.3%	19.8%	28.8%	25.1%	12.3%	2.9%	0.2%	Nil
Jun-27	0.3%	1.9%	7.4%	18.1%	27.4%	25.6%	14.2%	4.3%	0.6%	Nil
Sep-27	0.2%	1.6%	6.5%	16.2%	25.8%	26.0%	16.2%	6.1%	1.3%	0.1%

Data source: CME Fedwatch

After the 25-bps rate cut in September, markets are factoring in some aggressive rate cuts by the FOMC to ensure that the problem of joblessness does not spiral. Here is a dekko.

• Let us first look at the October 2025 meeting. The CME Fedwatch is betting on another 25-bps rate cut in October with a very high probability of 98.3%, and looks certain.
• For December 2025, the last meeting of this year, the CME Fedwatch is assigning a high probability of 91.1% to another 25-bps rate cut, taking the level to 3.50%-3.75%.
• In the first half up to June 2026, CME Fedwatch is factoring in additional 50 bps rate cut taking the level off Fed rates to 3.00% to 3.25% with a strong probability of 62%.
• In the second half of 2026, up to December 2026, the CME Fedwatch is factoring in a best case of 25 bps rate cut, but even that does not appear to be too assured now.

CME Fedwatch probabilities beyond 8-9 months have little predictive ability as the market conditions change at short notice. Hence, we shall not give too much credence to the 2027 projections. What we are looking at is 2 more rate cuts in 2025 and, another 2 to 3 rate cuts of 25 bps each in year 2026. The bottom line is that even after all these cuts, the equilibrium neutral rate of interest is likely to be substantially higher than the pre-COVID levels!