October Executive Briefing: The price of US strength is getting steeper
Rate hikes are expected to curb demand‑driven price pressures, yet they also create an unintended side effect: higher interest income for affluent consumers and retirees, bolstering the group that is arguably the least sensitive to rates and a major driver of consumer‑concerns about fiscal sustainability. Higher interest rates feed directly into fiscal strain, worsening the debt‑to‑GDP path from an already troubling baseline.
The burden of higher rates is unevenly spread—households taking on new debt feel it first. As existing borrowing rolls over and new debt is issued at higher rates, effective borrowing costs for households should rise, pushing the debt‑service ratio higher even though overall household indebtedness, measured by debt‑to‑income, remains relatively low.
September CPI is just the tip of the iceberg
The Consumer Price Index posted an uncomfortable upside surprise. Core inflation rose 0.3% month‑over‑month, and the year‑over‑year rate re‑accelerated to 2.6%. Prices for core goods were especially problematic, with import‑heavy categories recording some of their largest monthly gains on record.
This reflects a tariff and transportation‑cost story that is only beginning to appear in consumer prices. The pipeline looks more worrisome, and the breadth is confirmed across indicators: ISM price indices, the Producer Price Index (PPI), NFIB price data, and the import price index all point in the same direction.
Freight costs remain extremely high, and for most product categories those costs appear to be passed on to consumers, supported by positive trade‑services margins.
The uncomfortable truth is that September’s CPI does not fully capture the upside risks still building from tariffs and energy prices. Our base‑case forecast of 2.5% core CPI in 2026 remains unchanged, but there are signs of more problematic energy‑price spillovers across many categories, especially as over half the CPI basket continues to run at 3% or above.
Supply‑chain and transportation‑cost pass‑through is the top risk to a goods‑price acceleration. The PPI reports alarmingly high freight costs across land, air, and sea: deep‑sea freight surged 37% year‑over‑year, general freight trucking rose 17%, and air freight increased 6%. In September alone, transportation and warehousing jumped 3.4% month‑over‑month, indicating acute margin pressure. Import prices excluding petroleum rose 0.8% month‑over‑month, signaling inflation spreading beyond energy.
Tariffs and import‑price inflation remain problematic. Toys and recreational goods recorded their largest‑ever monthly CPI gains in September, and meaningful holiday discounts appear unlikely, adding to the risk of further acceleration this year. The pass‑through will intensify as pre‑tariff inventories dwindle and IEEPA refunds conclude.
Core services disinflation cannot offset the pressure. Core services excluding housing have never posted a negative year‑over‑year change, and monthly declines are exceedingly rare. Consequently, we should not rely on services to pull inflation lower. Moreover, Social Security recipients will receive a 3.6% cost‑of‑living adjustment in January 2027, injecting spending power into a cohort that drives most services demand, especially health care. Concerningly, the housing reprieve has largely faded; further tightening could worsen the long‑term prospect of housing inflation re‑accelerating as new supply remains constrained by high rates and input costs.
Growth outlook
Inflation outlook
Labor market outlook
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