Energy prices once again dominate inflation trends, but core pressures are marginally easing, providing support for the Federal Reserve to hold steady.

The U.S. Bureau of Labor Statistics will release September CPI data on Wednesday, October 14. According to Wind Trading Desk reports, Barclays and Morgan Stanley forecast that overall CPI will accelerate due to a sharp rise in gasoline prices; however, core CPI month-over-month growth is expected to modestly narrow from August, primarily because the pace of wireless communication services price increases has partially reversed. Both institutions project core CPI month-over-month growth at 0.24%, below August’s 0.29%.

This data will directly influence the Federal Reserve’s October FOMC meeting decision. Barclays Research believes that despite ongoing upside inflation risks, Fed officials are likely to maintain rates unchanged in October, continuing to monitor incoming data and pushing the 25-basis-point hiking path to December.

Earlier Federal Reserve minutes from the September meeting indicated that “most” officials expect one more rate hike this year, though they signaled no urgency in October. Fed Governor Waller stated that rate hikes need not occur consecutively, allowing officials to flexibly time decisions based on economic data. The market has already shifted expectations from a October hike to December, with Goldman Sachs suggesting a higher probability of a December increase, yet the possibility that the FOMC ultimately concludes no further tightening is equally significant.

Energy Drives Overall Inflation, Headline Data Surges

Barclays forecasts a 0.58% month-over-month increase in overall CPI (seasonally adjusted) for September, rising to 3.7% year-over-year—up about 0.3 percentage points from August’s 3.4%, though still below the 4.2% peak reached in May this year. Morgan Stanley’s forecast is slightly higher: 3.69% year-over-year and 0.62% month-over-month.

Energy is the primary driver behind this surge in overall inflation. According to Barclays, the energy component rose 5.05% month-over-month, with gasoline prices surging 9.23% month-over-month and a year-over-year increase of 34.8%; heating oil rose even more sharply, up 38.8% year-over-year.

Morgan Stanley notes that continued tensions in the Middle East are a key factor driving oil prices higher, which will further transmit to airfares and transportation costs. Barclays’ research team previously warned that diesel price increases are gradually being passed through to American consumers.

Core Inflation Moderates Slightly, Wireless Communication Decline as Main Driver

While overall inflation rises, core CPI pressures show slight moderation. Barclays forecasts core CPI increasing 0.24% month-over-month in September, reaching 2.5% year-over-year; Morgan Stanley’s forecast matches this at 0.24%, both down 5 basis points from August’s 0.29%.

The main driver behind this slowdown lies in the “Education and Communication” sub-component. In August, wireless communication service prices surged unusually, contributing approximately 0.1 percentage point to core CPI. Barclays expects Verizon’s latest price hike combined with AT&T’s reduced planned increase to continue exerting upward pressure in September, though significantly less than in August.

Meanwhile, airfares and medical care prices remain key supports for core inflation. Morgan Stanley notes that airfares rose 23% year-over-year in August and are projected to increase 1.8% month-over-month in September; Barclays forecasts a 2.6% month-over-month rise. Morgan Stanley adds that jet fuel prices have risen nearly 90% year-over-year, and since fuel accounts for roughly 20% to 30% of airline operating costs, airlines may have already fully passed on cost increases. Additionally, after weakening in August, medical care is expected to rebound 0.55% month-over-month in September, according to Morgan Stanley.

On the core goods front, both Barclays and Morgan Stanley forecast month-over-month growth remaining in the 0.13% to 0.14% range—essentially flat compared to August—with slight strength observed in new and used car prices.

Housing Inflation Stabilizes, Insurance Continues to Weigh Down

The housing component continues its stable trajectory. Barclays forecasts owner equivalent rent (OER) rising 0.24% month-over-month in September, with primary residence rents up 0.23%; Morgan Stanley predicts OER and primary residence rents at 0.25% and 0.20%, respectively. Morgan Stanley notes that since May, housing inflation has averaged around 0.24% monthly—slightly below the pre-pandemic long-term trend of 0.26%—and expects near-term fluctuations to remain within this range.

Auto insurance continues to weigh on core inflation. Morgan Stanley forecasts auto insurance premiums declining 0.20% month-over-month in September, with the negative trend expected to persist through 2027, primarily due to improved insurer profitability prompting price cuts to capture market share.

Hotel prices rebounded strongly in August after two consecutive months of abnormally weak performance. Morgan Stanley forecasts hotel prices to return to flat (0% month-over-month) in September.

PCE Inflation Forecast: Expected to Remain Near 3%

CPI data also provides meaningful guidance for the Fed’s more closely watched PCE inflation metric. Barclays forecasts core PCE inflation at 0.22% month-over-month for September, with year-over-year inflation around 3.0%; Morgan Stanley’s forecast is slightly higher at 0.23% month-over-month.

Barclays researchers Pooja Sriram, Marc Giannoni, Jonathan Millar, and Colin Johanson note that there remains some uncertainty surrounding financial services PCE prices, particularly due to the U.S. Bureau of Economic Analysis (BEA) adopting a new methodology to estimate portfolio management service prices, where required nominal expenditure and labor hour data may not be timely or available, complicating forecasting. The team states it will refine its projections following the release of next week’s CPI and PPI data.

Fed Policy Path: Hold Steady in October, 25 Basis Point Hike in December

From a policy path perspective, Barclays maintains its baseline forecast: a 25-basis-point rate hike by the Fed in December. The firm notes that due to base effects, the six- and twelve-month inflation indicators favored by Chair Powell are unlikely to improve significantly this year, though prospects for 2027 appear markedly brighter.

Recent Fed official statements suggest that uncertainty in inflation outcomes could support further tightening from a risk management standpoint; however, Barclays expects policymakers to choose to wait and see in October, awaiting additional data confirmation.

Notably, Morgan Stanley highlights several key variables requiring close monitoring in this report: first, Apple’s September 9 launch of new iPhone models, which increased prices for certain older models by 10% to 14%; however, smartphones carry only about 0.2% weight in the CPI basket, and sampling in some regions occurs bi-monthly, so the direct impact is expected to be no more than 1 to 1.4 basis points; second, whether airfare price increases have already approached their ceiling; third, whether housing inflation can sustain its current stable pace.

By: Zhang Yaqi, Wall Street Daily