Hot inflation data puts Fed in complicated spot

Inflation data for September indicates price pressures are still weighing on the economy, putting Federal Reserve officials in a tricky position ahead of their decision on interest rates later this month.

Annual inflation was 3.7 percent last month, as measured by the consumer price index (CPI), an increase from 3.4 percent in August and the highest mark since May.

Investors responded to the data by increasing the odds of Federal Open Market Committee (FOMC) officials raising rates by a quarter point at their next meeting, set for Oct. 27-28.

Robin Brooks, a senior fellow at the Brookings Institution, wrote Wednesday on the social platform X that the CPI data “puts an October hike back on the table.”

The data provides the central bank with further evidence that inflation is not approaching its 2 percent target, as Fed Chair Kevin Warsh is set to speak at a gathering of finance ministers in Thailand on Friday local time.

Heather Long, the chief economist at Navy Federal Credit Union, said Wednesday the inflation data makes the Fed’s decision on interest rates a “coin flip” between hiking rates by a quarter point for a second straight meeting and holding them between 3.75 percent and 4 percent.

“It’s tricky. It will be a hot conversation in that room,” Long told The Hill.

Traders on Tuesday were pricing in a nearly 78 percent chance of the FOMC holding rates, according to the CME FedWatch tool . But after the Bureau of Labor Statistics (BLS) released September’s inflation report, those odds sank to roughly a 67 percent chance as of Wednesday afternoon.

The latest inflation data shows that energy prices rose 5.2 percent from August to September and were up 20.4 percent year over year. Gas prices were up 9.1 percent from August, accounting for more than 50 percent of the overall rise in prices.

Core prices, which don’t include more volatile food and energy costs, were up 2.6 percent last month from September 2025. Food prices held steady from August to September, the BLS reported.

Brooks noted Wednesday that wireless services, which rose by 5.9 percent from July to August, contributed heavily to the latter month’s core inflation reading of 2.4 percent. That gave the Fed a “reasonable excuse to pause” and hold rates steady later this month, he argued.

But the latest CPI data showed monthly price spikes for an array of products, including 0.7 percent for used cars and trucks, 0.3 percent for apparel and 0.3 percent for medical care services.

Taken together, the numbers indicate inflation is a “lot more broad-based and entrenched” than economists thought, Long argued.

“It’s a real squeeze. … Many Americans are financially worse off, certainly, than they were six months ago. But many Americans are worse off than they were a year ago,” she said.

After the FOMC unanimously voted to raise rates in mid-September, committee officials have signaled future rate hikes are coming — while noting they need to evaluate data as it trickles in.

Beth Hammack, the president of the Federal Reserve Bank of Cleveland, said Monday that “demand-side” inflationary pressures, such as from the artificial intelligence buildout, are “not self-correcting” and will persist even if energy prices fall upon an end to the Iran war.

“Because of the breadth of inflationary pressures, my baseline forecast is that it will take some time for inflation to return to 2 percent, even with appropriate monetary policy,” Hammack said at a National Association for Business Economics meeting.

Warsh avoided forecasting future monetary policy decisions after the Fed raised rates last month, telling reporters he was “ill-prepared” to do so.

The Fed chair will deliver his first remarks since his post-hike press conference on Friday, when he will speak alongside International Monetary Fund Managing Director Kristalina Georgieva in Thailand.

Joe Mazzola, the head trading and derivatives strategist at Charles Schwab, wrote Wednesday it is “unclear” whether Warsh will discuss policy issues in Thailand.

Looming over the heads of FOMC officials are President Trump’s repeated calls for them to lower interest rates. While he has praised Warsh, the president said last week other Fed officials “would like to see the country do badly.”

Plus, the next FOMC meeting is set for less than a week before the midterms, with Republicans fighting economic headwinds as they try to hold on to Congress for the final two years of Trump’s term.

There is precedent for the Fed hiking rates right before the midterms — officials did so in 2022 , after inflation reached a 40-year high earlier that year.

But Long, citing the political implications of another hike, predicted that the FOMC will keep rates steady later this month before hiking in early December.

“When it’s that close of a call, this is the one meeting where the election matters,” she said. “I know they like to say they’re apolitical, and generally they are, but … the bar is extra high to hike a week before an election.”

Long added, “If there were a real need to do it, they would do it. But when you’re sitting here and it’s kind of 50-50, it’s hard [not] to look around the table and say, ‘Gee, if we wait till December.’ … It’s not like the economy is going to fall apart if they wait till December.”