U.S. Inflation Cools to 3% in September as Traders Bet on Fed Pivot

U.S. inflation eased more than expected in September, reinforcing confidence that the Federal Reserve is nearing its long-anticipated policy pivot. Headline CPI rose 3% from a year earlier, just below forecasts for 3.1%, while core inflation — excluding food and energy — also slowed. The softer reading ignited a rally across risk assets, with the S&P 500 (Zorrox: SPX500.) climbing as traders priced in higher odds of a rate cut before year-end.

Cooling Across Core Components

The monthly CPI increased 0.3%, a touch lower than August’s 0.4%, signaling continued moderation in price momentum. Energy remained the main driver, with gasoline up more than 4%, but most other components cooled. Shelter inflation rose at its slowest pace in nearly two years, and prices for durable goods — from appliances to used cars — were broadly flat.

Core inflation, up 3% from a year earlier, marked the smallest annual rise since early 2021. The combination of easing rents, stable goods prices, and softer wage growth suggests that the long-running disinflation trend is intact. Economists said the figures confirm that inflation is normalizing without triggering a sharp slowdown in demand — exactly what the Fed wants to see.

Markets Shift Toward an Easing Outlook

Treasury yields fell sharply after the release, while futures markets moved to price in a roughly two-thirds chance of a 25-basis-point rate cut at the Fed’s December meeting. Rate-sensitive sectors such as technology, real estate, and consumer discretionary led equity gains, while the dollar softened modestly against major peers.

Still, policymakers are likely to remain cautious. Chair Jerome Powell has emphasized the need for “clear and sustained” progress on inflation before cutting rates. September’s data move in that direction but may not yet be decisive. Services inflation — particularly in healthcare and insurance — remains sticky, a reminder that the final stretch toward the 2% target could prove the hardest.

What to Watch Next

Attention now turns to the upcoming Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge. A further cooling there, combined with softer wage growth in the next jobs report, would likely lock in expectations for a December cut.

Investors will also be watching speeches from Fed officials in the coming days for signs of consensus or hesitation. Markets are hypersensitive to tone shifts — a single phrase hinting at “progress” rather than “patience” could be enough to drive repricing.

Tips for Traders

• Track the S&P 500 (Zorrox: SPX500.) for confirmation that risk appetite is holding — sustained strength would validate expectations of Fed easing.

• Watch short-term Treasury yields, where sharper declines would signal growing conviction in an imminent policy shift.

• Follow core PCE and labor data, as weaker readings will strengthen the case for a December cut.

• Keep an eye on Fed commentary — subtle changes in language often precede actual policy moves.

• Consider event-driven volatility strategies around major data releases; macro sensitivity remains high while policy direction is in flux.