Markets Surge as CPI Cools — Fed Seen Cutting Rates and Ending QT

The September CPI report landed at a critical moment — not just for investors, but for the Federal Reserve. With much of the government shut and normal data flow frozen, this inflation print will be the only official BLS number policymakers get before next week’s Fed meeting. The number itself was encouraging : headline CPI rose 3.0% year over year and 0.3% month over month, signaling that price growth is still positive and broad but not re-accelerating. That was enough to spark an immediate rally that pushed major U.S. equity benchmarks to fresh all-time highs intraday as investors began to price in not only a high likelihood of a 25-basis-point rate cut, but also a potentially more dovish message on the Fed’s balance sheet runoff. Some of those gains faded ahead of the open as traders locked in profits, but the tone looks constructive heading into the final trading day of the week.

Under the surface, the CPI mix continues to tell a two-track story: goods inflation is largely cooling, but services inflation — especially anything tied to housing, care, and labor — remains sticky. Shelter costs are still the single biggest source of persistent inflation. Shelter rose 3.6% year over year, with rent of primary residence up 3.4% and owners’ equivalent rent up 3.8%. Even on a one-month basis, shelter rose another 0.2%, and rents rose 0.3%. This is exactly the kind of slow-moving, hard-to-crush inflation the Fed keeps referring to when it talks about the need for “more confidence” that price pressures are easing. As long as shelter is grinding higher, the services side of the economy keeps an inflation floor under core CPI, even if other components cool.

Services more broadly (excluding energy services) rose 3.5% year over year and 0.2% month over month. That includes categories that are directly felt by households: medical care services are now up 3.9% year over year; hospital and related services are up 5.8% year over year and +0.8% in just one month. Childcare and elder care are flashing red. Day care and preschool costs are up 5.2% year over year and jumped 1.7% in a single month. Care of invalids and the elderly at home is up 11.6% year over year and spiked 7.0% month over month. Those are huge moves for services categories that people can’t easily substitute away from. This is the “stickiest” kind of inflation because it’s driven by wages, staffing shortages, regulation, and demographics — not by commodity prices or shipping costs — and so it doesn’t fall quickly even if the Fed chokes off demand in other areas.

Housing-related add-ons are also biting. Tenants’ and household insurance is up 7.5% year over year and rose another 1.2% just in September. That’s a stealth cost of shelter: even if rent moderation eventually shows up, insurance, utilities, and fees are doing their part to keep the real-world cost of having a roof elevated. Electricity is up 5.1% year over year, and piped gas is up a huge 11.7% year over year, even though both eased a bit on the month. In other words: energy services are meaningfully more expensive than a year ago, even if we got a small month-to-month breather in September.

By contrast, goods inflation continues to behave the way the Fed wants. Core goods (commodities less food and energy) are up just 1.5% year over year and 0.4% month over month. Tech hardware is outright deflationary: smartphones are down 14.9% year over year and fell another 2.2% month over month, and broader information technology commodities are down 5.1% year over year. Big-ticket household durables — traditionally sensitive to tariffs and supply chain frictions — are not flashing panic. New vehicles are up only 0.8% year over year and were flat month over month. Major appliances are actually down 0.6% year over year and barely moved in September. Motor vehicle parts and equipment are up 3.1% year over year and 0.5% month over month — not great, but not spiraling.

That’s important for markets because it suggests that, so far, tariff noise and supply-chain rerouting haven’t sparked an across-the-board spike in sticker prices on physical goods. If tariffs were slamming the economy in a broad, inflationary way right now, you’d expect to see it in cars, appliances, electronics, and other import-heavy categories. You don’t. Instead, the real heat is in labor-heavy services and in structurally tight areas like housing and caregiving. That gives the Fed a little more cover: they can argue headline inflation is moving in the right direction even though some components are still stubborn.

Food is behaving better than it did in the 2022–23 spike, but with pockets of stress. Food at home is up 2.7% year over year (0.5% month over month), and food away from home is up 3.7% year over year (0.1% month over month). Those are manageable numbers compared to the double-digit surge consumers remember. But not everything on the grocery list is calm. Meats are up 8.5% year over year and 1.6% month over month. Beef and veal are up 14.7% year over year. Uncooked beef roasts are up 18.4% versus last year and nearly 4% in a single month. Coffee is up 18.9% year over year. Candy and sweets are up 9.8% year over year. So while the overall “food” bucket looks tame, certain proteins and indulgences are still aggressively repricing higher. The flip side: eggs are down 1.3% year over year and fell 2.1% in September, a rare relief valve in protein pricing.

Transportation costs are mixed. Used cars and trucks are back to being more expensive than a year ago (+5.1% YoY), but they actually fell 1.0% month over month in September, so buyers got a little short-term relief. Airline fares, notoriously jumpy, are now up 3.2% year over year and leapt 2.8% in a single month, hinting that travel demand still carries pricing power. Motor vehicle maintenance and repair remains a pain point: +7.7% year over year. Owning the car, not buying it, is increasingly the cost center.

Put it all together, and here’s why the market reacted the way it did. First, headline inflation at 3.0% with a 0.3% monthly gain is exactly the kind of “good enough” number traders wanted in the vacuum of data created by the shutdown. Second, there is nothing in goods pricing that screams “second inflation wave,” which lowers the odds the Fed has to posture hawkish next week. Third, because this CPI print is required to calculate the Social Security cost-of-living adjustment, it’s locked in — and the Fed has to treat it as the baseline input. That’s fueling expectations not only for a 25 bp rate cut, but also for a dovish tilt in the balance sheet discussion: investors are starting to bet the Fed could soon wind down quantitative tightening and slow the pace at which it lets assets roll off.

The market pop on the print — with equities hitting new highs before fading — reflects that setup. The initial reaction was classic “soft landing plus easier Fed”: growth stocks ripped first, then cyclicals and rate-sensitive areas followed. As the day wore on, some of that enthusiasm cooled, partly just profit-taking and partly nerves ahead of the Fed. But the tone into the end of the week is still broadly constructive. The CPI wasn’t perfect — shelter, childcare, and medical costs are still running hot — but it was good enough to keep the “Fed is done tightening” narrative intact. In this tape, “good enough” is bullish.