Inflation measure closely watched by Fed seen accelerating in Sept - Truflation

 A key reading of U.S. inflation closely monitored by the Federal Reserve is expected to accelerate in September due to elevated energy costs and tariffs, according to alternative data provider Truflation. 

Truflation said it expects last month's personal consumption expenditures price index to speed up to 3.6% on an annualized basis, up from 3.4% in August.

Stripping out volatile items like food and fuel, the so-called PCE measure from the Bureau of Economic Analysis is tipped to rise to 3.1% from 3.0% previously.

"[T]he latest acceleration remains concentrated in supply side pressures rather than reflecting a broad based resurgence in consumer demand. However, the growing transmission of higher input costs into producer prices and services raises the risk that inflation could become more persistent," Truflation wrote.

Although recent shipping data has indicated that oil flows out of the Persian Gulf have begun to recover, crude prices remain higher than levels before the start of a joint U.S.-Israeli assault on Iran in late February.

Crude oil prices were higher throughout September, with U.S. West Texas Intermediate trading between $92 and $103 per barrel, significantly above August levels. Analysts have been hunting for signs that these increases are feeding into the wider economy.

At the same time, an aggressive U.S. trading stance has threatened to pass through into consumer goods like clothing and footwear, Truflation said in a note.

The PCE report, particularly the core result, is used by Fed policymakers to gauge inflationary pressures. However, the report, which is due out on Thursday, will come a day after the central bank's Federal Open Market Committee has made its latest interest rate announcement.

Without the latest PCE, the latest look at inflation comes from the Labor Department's consumer price index for September. The annualized CPI figure stood at 3.7%, compared to 3.4% in August and economists' expectations of 3.6%.

Despite the hotter-than-anticipated CPI, the Fed is tipped to skip an interest rate hike this month. While Fed officials have stressed the importance of quelling inflation back to their 2% target level, some policymakers have downplayed the urgency for another rate hike. In September, the Fed lifted rates for the first time since 2023, largely in an attempt to cool price growth.

According to CME FedWatch, there is about a three-in-four chance that the Fed opts to raise borrowing costs again at its final policy meeting of the year in December.

"Monetary tightening can temper demand and second round effects but cannot directly increase energy supply or reverse tariffs," Truflation wrote. "Further action depends on whether the shock becomes embedded in core services, wages and inflation expectations."