Fed Watch – 10/16/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Adobe Podcast.

Inflation, core inflation, super core inflation. We’re cutting through the noise of all of these different metrics right here on ITR Economics Fed Watch. Hi, I’m Lauren Saidel-Baker, and we got CPI this week. There was a barrage of headlines. The first the overall CPI print up 3.7% year-over-year in September. That is a big number. You’ll note that number is pretty far away from 2%. So, we’ve seen a number of different headlines out this week cutting that data different ways to really get at what is happening in pricing pressures, and well, what does that mean for the Fed?

So, we see that 3.7% overall inflation number. That is very much driven, if not completely, at least partially by high oil prices, high energy prices. We know this is a continual pressure driven by the conflict in the Middle East. Energy prices overall up 5.2%, and that drove other categories up as well. One notable example is airfare, those costs were up an eye popping 22.4% year-over-year. That is a huge number. We just don’t see numbers like that very frequently in these major categories. So, we know that consumers are feeling this. They are complaining about this. We’re getting a lot of that just kind of pessimism surrounding numbers like this. But what does that mean for actual cost? Well, energy, as you know, is one of the more volatile categories. And that’s why there’s this additional metric called core inflation that strips out two of the most volatile categories, which are food and energy. But in September, we saw that core number up 2.6%, which again, say it with me, 2.6% is higher than 2%, the Fed’s target for inflation. So, we are still seeing this ongoing pressure even on a core basis.

Now, I mentioned another measure of inflation that you’re probably hearing more and more about. That is so-called super core inflation, what with that strips out a shelter costs. Shelter costs are actually the largest single contributing component of the consumer price index, and we see them being somewhat sticky right now, both as home prices are high and rising in many areas, as well as these higher mortgage rates. It’s a little circular back to the rates that we’re talking about here at the end of the day. So super core inflation strips out shelter costs to, again, give us that view of what an average consumer is kind of feeling if you’re maybe not going out today and, and buying a house, what is that trend really telling you now? Super core inflation in September was actually up a bit more, that was up 4.6%. So, I want to get back to the statement I made at the top of this show, and that is that this is not just one thing causing higher prices. There is no just magic bullet that could cure inflation. It isn’t just energy costs. While those are a contributing factor, we see this really pervasive pressure coming from multiple different areas. Tariffs are another one that you’re probably starting to hear about again. One category that I’ve been reading many headlines about is toys, specifically toy imports, ahead of this holiday shopping season. And toys themselves are very representative of that tariff environment, due to both what types of imports these are coming through and where tariffs have been imposed lately. So, you’ll see toys, I think, as a somewhat fun, but also very telling example of that tariff impact.

Another big one though is just the AI build out. We talk about AI, automation, all of these technological changes that can yield incredible efficiencies in really great results. But all of the AI and data center build out that is causing a lot of constraint. It’s not purely a golden screw problem, as we’ve seen in the past, but we’re getting closer and closer into that environment where data center construction is taking up just such so much air out of the room. Data centers are being built at a much higher growth rate than many other non-residential construction segments. And so that’s demanding resources in a way that we hadn’t seen in recent years. That means competition is fierce for both the components as well as the labor for all of these facilities. There’s a lot of money flowing through AI and data centers, and so that money is able to sop up the resources, the labor, the components. And we’re seeing a very elevated prices in other more tangential areas that other folks who don’t have, say, the same deep pockets as AI companies, they are starting to feel the pinch and really make some different choices.

At the end of the day, real wage growth is something that we find very challenged. All of this inflation, it is taking a bite out of our employees’ paychecks. That’s going to be an increased hindrance for the average US consumer. We’ve been talking about this a lot in the past. So, when we see inflation outpace income growth, that’s going to be a real risk for consumer spending, which, as we’ve said before, does drive about two thirds of gross domestic product. So, what does all of this mean for our purposes here today, which is watching what the Fed will do? Well, odds are still off for another rate hike to come in October. However, odds are looking pretty good for an increase in December. And I think the real question does not end with our calendar year. It’s where do we go from here? What does this overall path of rates taking us into 2027? Very clearly, we are looking for continued significant rise in rates. This really matches the forecast that you’ve been getting for quite some time now from ITR Economics. So, look for those rates to go up, not down, not even sideways. At the end of the day, this week’s inflation print really reinforces that path. The inflation beast is not yet tamed. More to come on that and we hope you’ll follow it right here with us on ITR Economics Fed Watch.