The Big Picture

Briefing.com Summary:

*Wall Street's popping champagne after the September CPI report; Main Street's still clipping coupons.

*The Fed is going to cut rates on October 29, but not because it has slayed inflation.

*The 2026 COLA is 2.8%, below the current rate of inflation.

The much anticipated and long-awaited Consumer Price Index (CPI) for September was finally released, and when it was, there was a big exhale heard from Wall Street. Breathe in—here come the headlines. Breathe out—the headlines were better than feared.

Total CPI increased 0.3% month-over-month, while core CPI, which excludes food and energy, increased 0.2%. The market had been expecting increases of 0.4% and 0.3%, respectively, that would have left total CPI and core CPI both up 3.1% year-over-year. As it turned out, they were each up 3.0%.

It was a glorious report for a market that did not want any of this data to upset its vision of a rate cut at next week's FOMC meeting. Well, it didn't, and it won't. Market participants can bank on a 25-basis-point cut in the target range for the fed funds rate to 3.75-4.00% on October 29.

Frankly, they already were. The CME FedWatch Tool showed a 98.3% probability of a 25-basis-point cut the day before the CPI report was released. In its wake, that probability now sits at 96.7%.

As glorious as the report was for Wall Street, you won't hear the same exhale from Main Street. This was a K-shaped inflation report.

A Window Seat

Your author had a schedule conflict that got in the way of seeing the report released in real time. When there was time to review the details and hear the musings of others who had done the same already, it struck your author that there was a good bit of excitement that used car and truck prices decreased 0.4% month-over-month in September.

That was indeed a point of relief for anyone buying a used car or truck in September, yet there are some residual points that need to be made.

First, used car and truck prices were still up a hefty 5.1% year-over-year. Secondly—and this is the window to the K-shaped report argument—how often is one really buying a used car or truck? Answer: not often. Certainly not as often as one pays for food at home, food away from home, gas, utilities, apparel, rent, insurance, various other services, and medicine.

That is where Main Street is still holding its breath, waiting for more inflation relief. Let's briefly take a look at where inflation sits with those items, with special attention on the year-over-year price changes.

The good news is that the costs for gasoline, apparel, and wireless phone services are all less than they were a year ago. In other words, there was deflation in those key consumer categories. Collectively, though, it isn't enough.

The table above captures 15 regular cost categories from the September CPI report. The average increase for these 15 categories is 3.4%. We don't have the benefit of seeing the September employment report, which is still on ice due to the government shutdown, but the August report showed average hourly earnings up 3.7% year-over-year.

Employed consumers, therefore, are earning just enough to stay ahead of inflation, yet that doesn't mean they aren't feeling the pinch. If your earnings are up 3.7% year-over-year, but your electricity bill is up 5.1% year-over-year, that hurts.

Similarly, we doubt retirees dependent on Social Security payments or others needing Supplemental Security Income (SSI) were breathing a sigh of relief over the September CPI report. They learned after its release that their cost-of-living adjustment for 2026 will be 2.8%.

Maybe there will be a stronger disinflation trend in coming months, but for these recipients, there is going to be a primacy and recency bias that takes their breath away. The first thing they heard from the September CPI report is that inflation was up 3.0% year-over-year. The last thing they heard was that their COLA for 2026 is 2.8% (i.e., below the current rate of inflation).

Briefing.com Analyst Insight

Federal Reserve officials also heard inflation was up 3.0% year-over-year in September. That is well above the Fed's 2.0% inflation target, which candidly is pegged to PCE inflation. Nevertheless, a 3-handle for CPI will be a lot for some of those officials to handle, not that it will stop them from agreeing to a rate cut on October 29.

They may not be so agreeable when the December FOMC meeting rolls around if there is still a 3-handle on inflation and the labor market isn't showing material signs of weakness. That will be a fight for another day. Wall Street is content for now, knowing that the September CPI report went its way. Therefore, it will stick with the house view that inflation won't heat up because of the tariffs or because the Fed is cutting rates, never mind that CPI inflation was 2.3% in April.

An impending rate cut is the one thing Wall Street and Main Street can cheer simultaneously on the other side of the September CPI report.

For Wall Street, picture both hands clapping with a lot of hootin' and hollerin'. For Main Street, picture one hand clapping and only some hollerin'.

There is some welcome inflation on Wall Street, which can be seen in a 12-month gain of 17.1% for the S&P 500, and there is some not-so-welcome inflation on Main Street, which can be seen in a 3.0% year-over-year increase in CPI. That is the essence of the K-shaped September CPI report. Wall Street got what it wanted, while Main Street is still wanting.

--Patrick J. O'Hare, Briefing.com