US Inflation Expected to Moderate in September Despite High Oil Prices

Economists anticipate a deceleration in key US inflation indicators for September, despite the continued presence of high oil prices. This outlook, ahead of the U.S. Consumer Price Index (CPI) report, suggests that the Federal Reserve may have greater flexibility to temper its interest rate adjustments, according to OilPrice.com.

For September, headline inflation growth is projected to reach 0.5% month-over-month and between 3.6% and 3.7% year-over-year. These figures represent an increase from August's 0.4% month-over-month and 3.4% year-over-year rates. However, core CPI, which excludes the more volatile energy and food components, is expected to show a 0.2% rise in September, a decrease from 0.3% in August. The annual core inflation rate is forecast to remain stable at 2.4%.

Federal Reserve Outlook

The probability of a Federal Reserve interest rate increase at its upcoming October 27–28 meeting has substantially declined. Market expectations have fallen to approximately 19% to 20%, a notable reduction from over 70% observed in late September, as reported by OilPrice.com. This shift suggests a market belief in moderating inflation pressures.

Jeffrey Schulze, head investment strategist at the Franklin Templeton Institute, noted to Morningstar that while supply shocks have created a “sticky situation,” including oil supply disruptions, tariff impacts, and AI-related consumer goods price surges, these risks are expected to moderate into 2027. Schulze also indicated that this moderation might already be in progress, observing a broad softening in September.

Inflation Pass-Through Effects

While headline inflation reflects the influence of higher crude prices, economists highlight that broader core inflation categories have largely remained insulated from these effects, showing limited evidence of price pass-through. Airfares represent an exception, having absorbed the impact of ongoing energy shocks. Price increases in air travel exceeded 2% month-over-month in both July and August, and rose by 25% year-over-year, attributed to elevated jet fuel costs. Fuel constitutes approximately 17% to 21% of an airline's total operating expenses, making ticket prices particularly susceptible to oil price fluctuations.

In contrast, the broader retail and manufacturing sectors typically experience a delay of several months or even quarters before energy price increases manifest in their pricing. Schulze suggested that any significant pass-through effects in these sectors are more likely to appear towards the end of the year, rather than in the September CPI release, as detailed by OilPrice.com.