US September CPI at 3.7%: the transmission chain behind a second inflation wave
Read inflation data as part of a transmission chain rather than as a single year-on-year number.
The data: not just base effects
US CPI rose 0.6% month on month in September, the largest monthly gain in five months and above August's 0.4%. The annual rate climbed from 3.4% to 3.7%, above the 3.6% consensus. Stripping out food and energy, core CPI rose 0.3% on the month. Notably, price increases were spread across a wide range of components, which shows the pressure is not coming from a single category.
Link one: energy is the main contributor
Brent crude closed at 106.06 dollars on 14 October, roughly 70% higher year on year, with an October average of 103.31 dollars through the 14th. Higher energy prices lift both headline inflation and inflation expectations. Supply disruption risk in the Middle East is the main support for this leg in oil, while OPEC has cut its 2026 global demand growth forecast from 1.4 million barrels per day to 400,000 — supply risk and weakening demand coexisting.
Link two: from inflation to inflation expectations
The New York Fed's Survey of Consumer Expectations showed one-year US inflation expectations rising from 3.58% to 3.9% in September, with the three-year measure up 0.1 percentage point. Expectations are the hardest part of the policy reaction function to handle: once they de-anchor, bringing them back costs a great deal of output.
Link three: from expectations to the policy path
The market currently prices the Fed as holding in October and hiking 25 basis points in December, with a cumulative probability above 85% for a hike before year-end. Some institutional commentary also notes that while the inflation data supports further tightening, whether two consecutive meetings of action are warranted may divide the committee — and that rising long-end Treasury yields and a stronger dollar already constitute a degree of financial tightening in themselves.
Link four: from policy to the exchange rate
Higher rate expectations lift the dollar directly. The dollar index closed at 102.53 on 14 October, an 18-month high. Over the same period the renminbi's daily central parity against the dollar was set stronger in consecutive fixings — 6.7298 on 13 October, 6.7253 on 15 October and 6.7220 on 16 October — a path that does not track the dollar index exactly. The lesson is that an exchange rate is priced on both legs: a stronger dollar does not automatically mean every currency depreciates in step.
What would tell you the chain is still intact
Three things to watch: whether oil holds above 100 dollars, whether inflation expectations keep rising, and whether front-end Treasury yields confirm. If all three hold, the second inflation wave is intact and the dollar's rate advantage strengthens. If one clearly reverses, the original assumption needs to be reassessed.