The U.S. Consumer Price Index (CPI) report is due to be released on Wednesday, with economists predicting that key inflation metrics continued to moderate in September despite elevated oil prices, giving the Fed room to slow down on interest rate hikes. For September, economists expect headline inflation growth to clock in at 0.5% month-over-month and 3.6%- 3.7% year-over-year, up from 0.4% m-o-m and 3.4% Y/Y in August. Meanwhile, core CPI, which excludes volatile energy and food prices, is seen climbing 0.2% in September, down from August’s 0.3%, with the annual core inflation rate expected to hold steady at 2.4%. Additionally, the probability of a Federal Reserve interest rate hike at the upcoming October 27–28 meeting has dropped to around 19% to 20%, down significantly from over 70% in late September.

“You’ve seen supply shocks create a sticky situation,” Jeffrey Schulze, head investment strategist at the Franklin Templeton Institute, told Morningstar, referring to oil supply disruptions, tariff shocks and AI-related consumer goods’ price spikes. “But as we move toward 2027, some of these risks are going to start to moderate. That moderation may already be underway. I think you see softening across the board [in September].”

Source: Morningstar

While the headline inflation is already exposing the impact of rising crude prices, economists note that broader core inflation categories have remained insulated, showing little to no evidence of pass-through pricing. Airfares have absorbed the brunt of ongoing energy shocks, with price increases exceeding 2% m-o-m in both July and August and 25% Y/Y thanks to elevated jet fuel costs. Fuel represents roughly 17% to 21% of an airline's total operating expenses, making ticket pricing uniquely sensitive to oil price spikes. In contrast, pass-through effects for most retail and manufacturing sectors can take several months or even quarters to manifest. “I think that’s going to be something that potentially shows up closer toward the end of the year, rather than in the September release,” says Schulze.

Related: OPEC Sees Oil Demand Growth Surging to 2.6 Million Bpd in 2027

U.S. oil and fuel prices have come down from recent highs but remain elevated. Brent crude for December delivery fell 2.0% to trade at $104.60 per barrel at 7.00 am ET on Tuesday, while WTI crude for November delivery declined by a similar margin to change hands at $91.89/bbl. Meanwhile, the average price of gasoline across the U.S. clocked in at $4.3413 per gallon on Tuesday, down from $4.8133/gal a month ago but much higher than around $2.98/gal before the war broke out in late February. Unfortunately, diesel prices have hardly budged, currently averaging $6.2787/gal from $6.3151 a week ago.

Last week, U.S. President Donald Trump struck a deal with Russian President Vladimir Putin to supply Russian diesel to U.S. and global markets in an effort to curb soaring fuel prices. Russia has pledged to release more than 300,000 metric tons (approx. 2.25 million barrels) of diesel fuel immediately, with an additional 500,000 metric tons scheduled for delivery in November 2026. Russia will then release 1 million metric tons following the November allocation, with a potential 3 million metric tons also in the cards depending on the condition of Russian oil refineries.

As part of the deal, the U.S. Treasury Department issued a general license suspending sanctions on Russian diesel exports until April 7, 2027, although other assets such as those held in American banks remain frozen. Hardly surprisingly, the agreement has sparked bipartisan opposition in Congress, with a group of both Republican and Democratic senators pointing out that the move violates a 2022 law banning Russian energy imports. European leaders have also criticized the temporary carve-out, arguing that pressure on Moscow ought to be increased rather than eased.

However, the deal’s biggest critics have been energy experts, who have aptly noted that the deliveries are likely to have minimal impact on fuel prices. To wit, the initial delivery of ~2.25 million barrels is hardly enough to meet the United States’ consumption for a single day, estimated at ~4.1 million barrels. Those volumes look even more puny in a global middle distillates market which remains badly squeezed. Ukrainian drone and missile strikes have decimated Russia's energy infrastructure, slashing Russian diesel production by nearly 30% and forcing Moscow to restrict or ban some of its own fuel exports earlier in the year in a bid to protect domestic supplies. Prior to the attacks, Russian diesel exports averaged more than 3 million metric tons per month (~1,000,000 barrels per day).

By Alex Kimani for Oilprice.com

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