Fed officials want to hold off a rate hike this month. Will this week's inflation data let them?

By Greg Robb

A troubling rise in prices might trigger an interest-rate move at the Fed's meeting in late October

Headline CPI inflation is expected to rise 0.6% in September, the biggest jump in five months.

Some leading Federal Reserve officials have suggested over the past few weeks that they were hoping to skip an interest-rate hike at their meeting this month, holding off until their meeting in December.

Now they just need U.S. inflation data to cooperate.

That's why the September consumer-price index, due out Wednesday, is a big deal. A troubling rise in prices might trigger an increase at the Fed's meeting on Oct. 27-28. Waning inflation would allow the Fed to hold interest rates steady.

Many economists think the Fed wants to skip a hike in two weeks in part because the midterm elections take place six days later.

Core CPI is the most important measure

The most important measure for Fed officials is what's known as the core rate of inflation. It strips out volatile food and energy costs and gives a better sense of the future rate of inflation. This is the number the Fed will focus on.

The core CPI figure is projected to increase a modest 0.2% in September, down from 0.3% in the prior month. That should be enough to allow the Fed to pause at their late-October meeting, economists say, and raise expectations for an interest-rate hike in mid-December.

The yearly rate of core inflation, meanwhile, is expected to rise to 2.5%, from 2.4% previously.

Right now, Wall Street traders are projecting a 17% chance of an interest-rate hike at the October meeting.

A 0.2% core reading would not shift market expectations higher, wrote Stephen Juneau, U.S. economist at BofA Securities.

Avery Shenfeld, chief economist at CIBC Capital Markets, expects a 0.3% core inflation reading and thinks the Fed will hike this month.

"There are too many items still growing at more than a 3% pace," Shenfeld said.

Headline inflation likely surged 0.6% in September, the fastest pace in five months, due to higher energy prices, according to a poll of economists by the Wall Street Journal. The yearly increase in inflation is projected to have risen to 3.7%, from 3.4% in August.

Fed officials will also keep a close eye this week on wholesale inflation via the producer-price index, which will be released Thursday. The CPI and PPI both feed into the Fed's favorite measure of inflation, the personal-consumption expenditures (PCE) price index.

How high will interest rates ultimately go?

A large majority of Fed officials have penciled in one more interest-rate hike this year. Not as many, but a significant number, see another move in 2027.

Markets have priced in three total hikes, which would reverse the Fed's three easing steps in late 2025.

Kurt Lewis, head of central-bank policy at Piper Sandler, thinks the Fed will move three times and then assess the outlook for inflation. He thinks these moves won't hurt the U.S. labor market.

Fed officials have forecast that their favorite measure of inflation, the core level of the PCE index, will cool to a 2.5% annual rate in 2027, Lewis noted. If inflation readings don't show this improvement, the Fed will likely keep going with interest-rate hikes, he said.

Lindsey Piegza, chief economist at Stifel Financial, thinks it will take a minimum of three or four more interest-rate hikes to get inflation under control.

Fed officials are divided, Piegza noted. Some are concerned about inflation's upside potential, while others think prices will cool once tariffs roll off and energy prices stabilize.

-Greg Robb

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10-12-26 0700ET