Barclays and Morgan Stanley both expect September core CPI to slow to 0.24% month-on-month from 0.29% in August, mainly due to a pullback in wireless communication services prices.

Energy is pushing headline inflation higher, but core pressures are easing at the margin, giving the Fed grounds to stay put in October.

The US Bureau of Labor Statistics will release September CPI data on Wednesday, October 14.

According to Barclays and Morgan Stanley forecasts, September headline CPI will accelerate on a sharp rise in gasoline prices, but the month-on-month gain in core CPI is expected to narrow slightly from August, mainly because the surge in wireless communication services prices partially fades.

Both institutions forecast core CPI at 0.24% month-on-month, below the 0.29% reading in August.

The data will directly influence the Fed's October policy meeting decision.

Barclays Research believes that although near-term inflation risks remain skewed to the upside, Fed officials are likely to keep rates unchanged in October, continue to monitor incoming data, and push the 25 basis point hike path to December.

The minutes of the Fed's September meeting released earlier showed that "most" participants expected one more rate hike this year, but signaled no rush in October.

Fed Governor Waller said rate hikes do not need to come at consecutive policy meetings, and officials can flexibly time moves based on economic data.

The market has already pushed back rate hike expectations from October to December. Goldman Sachs believes a December hike is more likely, but the possibility that the FOMC ultimately judges no further tightening is needed is also quite substantial.

Energy Drives Headline Inflation

Barclays forecasts September headline CPI to rise 0.58% month-on-month (seasonally adjusted), with the annual rate climbing to 3.7%, up about 0.3 percentage points from 3.4% in August, though still below this year's May peak of 4.2%.

Morgan Stanley forecasts slightly higher, at 3.69% year-on-year and 0.62% month-on-month.

Energy is the core driver of this headline inflation jump.

According to Barclays forecasts, the energy sub-index will rise 5.05% month-on-month, with gasoline prices surging 9.23% month-on-month and 34.8% year-on-year; heating oil is up as much as 38.8% year-on-year.

Morgan Stanley noted that continued tensions in the Middle East are an important factor pushing oil prices higher, which will further pass through to airfares and transportation costs.

Barclays Research also warned in a previous report that rising diesel prices are gradually being passed through to US consumers.

Core Inflation Eases Slightly, Wireless Communication Pullback Is the Main Reason

While headline inflation climbs, core CPI pressures have eased somewhat.

Barclays forecasts September core CPI to rise 0.24% month-on-month and 2.5% year-on-year; Morgan Stanley's forecast matches at 0.24%, both down 5 basis points from August's 0.29%.

The main driver of the core inflation slowdown comes from the "education and communication" sub-index.

In August, wireless communication services prices jumped abnormally, contributing about 0.1 percentage point to core CPI in a single month.

Barclays expects that Verizon's latest round of price increases combined with a narrower planned increase by AT&T will still lift inflation in September, but with noticeably less force than last month.

At the same time, airfares and medical services prices remain supports for core inflation.

Morgan Stanley noted that airfares already rose 23% year-on-year in August and forecasts a further 1.8% month-on-month gain in September; Barclays forecasts airfares up 2.6% month-on-month.

Morgan Stanley added that jet fuel prices are up nearly 90% year-on-year, and fuel accounts for about 20% to 30% of airline operating costs. By that measure, airlines' pass-through of higher fuel costs may be close to complete.

In addition, after weakening in August, medical services are forecast by Morgan Stanley to rebound 0.55% month-on-month in September.

For core goods, Barclays and Morgan Stanley forecast month-on-month gains in the 0.13% to 0.14% range, roughly flat versus August, with new and used vehicle prices slightly firmer.

Housing Inflation Stabilizes, Insurance Drag Continues

The housing sub-index continues a steady trend.

Barclays forecasts September owners' equivalent rent (OER) to rise 0.24% month-on-month, with primary residence rent up 0.23%; Morgan Stanley forecasts OER and primary residence rent at 0.25% and 0.20%, respectively.

Morgan Stanley noted that since May, housing inflation has averaged about 0.24% per month, slightly below the pre-pandemic long-term trend of 0.26%, and is expected to fluctuate around that level in the near term.

Auto insurance continues to drag on core inflation.

Morgan Stanley forecasts September auto insurance premiums to fall 0.20% month-on-month, and expects the negative trend to persist through 2027, mainly because improved profitability is prompting insurers to cut prices to compete for market share.

On hotel prices, after strong gains in August following two consecutive months of abnormal weakness, Morgan Stanley forecasts a return to flat (0% month-on-month) in September.

PCE Inflation Forecast: Expected to Remain Near 3%

The CPI data also offers guidance for the PCE inflation gauge that the Fed watches more closely.

Barclays forecasts September core PCE inflation at 0.22% month-on-month and about 3.0% year-on-year; Morgan Stanley's forecast is slightly higher at 0.23% month-on-month.

Barclays researchers Pooja Sriram, Marc Giannoni, Jonathan Millar and Colin Johanson noted some uncertainty around financial services PCE prices, especially as the Bureau of Economic Analysis (BEA) uses a new method to estimate portfolio management services prices, and the required nominal spending and hours data may not be available in time, adding to forecasting difficulty.

The team said it will further revise its forecasts after next week's CPI and PPI data are released.

Fed Path: Hold in October, 25 Basis Point Hike in December

On the policy path, Barclays maintains its baseline forecast: a 25 basis point Fed rate hike in December.

The institution noted that due to base effects, medium- and long-term inflation measures preferred by Chair Warsh, such as the 6-month and 12-month gauges, will struggle to improve significantly this year, but the 2027 outlook will brighten markedly.

Recent Fed officials' comments show that uncertainty about the distribution of inflation outcomes may support further tightening from a risk-management perspective, but Barclays expects policymakers to choose to wait in October for more data confirmation.

Notably, Morgan Stanley reminds that several key variables in this report need close tracking: first, Apple raised prices on some older iPhone models by 10% to 14% when it launched new models on September 9, but since smartphones carry a weight of only about 0.2% in the CPI basket and sampling in some regions is bimonthly, the direct impact is expected to be no more than 1 to 1.4 basis points; second, whether further room for airfare increases is nearing a ceiling; third, whether housing inflation can maintain its current steady pace.