Consumer prices rose at 3.7% annual rate in September as gas costs skyrocket

The US Bureau of Labor Statistics will release the September Consumer Price Index (CPI) data on Wednesday. This report may indicate an increase in headline prices and a slight rise in annual core inflation. The Federal Reserve's policy outlook and the US Dollar's worth could be affected by any significant differences from analysts' expectations.

Economists anticipate a 0.6% increase in monthly CPI, following August's 0.4% rise, and a 3.6% annual CPI, up from 3.4% in the previous month. Core CPI, excluding volatile food and energy prices, is expected to rise 0.2% and 2.5% monthly and yearly, respectively. West Texas Intermediate (WTI) crude oil prices increased by approximately 5% in September, while diesel prices per gallon rose from $5.6 to $6.38, a 14% increase.

Analysts at Societe Generale emphasize the significant impact of diesel prices on US inflation, as they are deeply embedded in various sectors of the economy. Societe Generale estimates that a 1% year-over-year increase in diesel prices corresponds to a 0.06 percentage point rise in US inflation surprises. Fed policymakers' relatively cautious comments and disappointing September labor market figures have led investors to lower their expectations for a 25 basis point interest rate hike in October.

Currently, there is an 80% probability of a policy hold at the upcoming meeting. Fed Vice Chair Michelle Bowman stated there is no urgent need for additional rate moves this year. Minneapolis Fed President Neel Kashkari suggested that raising rates could put different pressures on various parts of the economy. Fed Governor Christopher Waller called for more rate hikes but emphasized the need for flexibility in their implementation.

The labor market saw only a 29,000 increase in nonfarm payrolls in September, falling short of the anticipated 90,000 and the unemployment rate rose to 4.2% from 4.1% in August. If the monthly CPI print shows a significant upside surprise of at least 0.7%, it could revive October rate hike expectations or confirm a higher federal funds rate in December, boosting the USD's strength.

Conversely, a soft inflation print of 0.4% or lower might reaffirm a policy hold in October, potentially weighing on the USD and helping EUR/USD stabilize in the short term. However, this outcome may not trigger a significant recovery, given the uncertainty surrounding the European Central Bank's (ECB) ability to tighten monetary policy amid growing concerns about France's fiscal outlook and the widening spread between German and French government bonds.