On September Inflation, Look Beyond the Headlines

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Those mentioned below merely represent a broader theme we wish to highlight.

The results are in! Social Security beneficiaries will receive a 3.6% cost-of-living adjustment next year, the biggest since 2023. To us, that is the primary takeaway from September’s Consumer Price Index report, which determines seniors’ annual pay bump. But headlines focused on inflation itself, warning high energy prices are now rippling through the broad economy. Some tied stocks’ volatility to this. We think that is a stretch. Look closely at the CPI report and you will see things didn’t worsen under the hood. Meanwhile, other news seems more relevant to the S&P 500’s rocky Wednesday.

Inflation did pick up. Headline CPI sped to 3.7% y/y from August’s 3.4%.^[i] Given oil’s September jump, that doesn’t surprise. It also isn’t what made everyone sweat. That honor went to “core” inflation, which excludes food and energy. This sped from 2.4% y/y to 2.6%, fueling (sorry) oil spillover concerns.^[ii]

But if you will forgive a metaphor, you can’t expect your dashboard to tell you exactly what is happening in your car’s engine. You must pop the hood. We popped CPI’s hood and don’t see an oil leak. Excluding energy, prices rose 2.6% y/y, matching January’s pre-war rate.^[iii] Or consider: Core goods rose just 0.7% y/y.^[iv] That matches August’s rate and is down from March’s 1.2% y/y high.^[v] Yes, the month-over-month rate inched from 0.1% to 0.3%, but monthly noise is normal. Extrapolating it is perilous. Core goods inflation sped suddenly to 0.4% m/m and 0.5% in April and May 2023, respectively, then fell in 13 of the next 15 months. January 2025’s 0.3% m/m surge was also a one-off. One month isn’t a trend. Note, too, much of the uptick came from used cars and clothes.

To us, inflation looks more like a political story than an economic one. We already have clear evidence the US economy and consumer spending can grow amid painfully high gas prices. Consumer spending is up more than prices. Fed rate hikes, while mistaken, are unlikely to disrupt this for now. But people feel inflation fatigue. Every month prices rise, however modestly, it snowballs on top of 2022’s inflation pain. Politicians know this, and inflation is a key issue in midterm campaigning. Much of the discussion focuses here, not on gas prices’ effects on GDP.^[vi]

Stocks know all this. And while they can swing any time, for any or no reason, we think it is kind of weird to blame a -1.1% drop on an inflation report that wasn’t a huge negative surprise.^[vii] Bond markets are telling here, too. Shocking inflation news would logically push yields higher. But bond yields were mixed. Shorter maturities rose. Longer-dated bond yields fell a smidge. That is a strong hint something else jerked sentiment Wednesday.

We suspect that something else is AI bubble fears, which resurfaced. AI cloud services company CoreWeave’s bond yield spiked to 15% Tuesday, and its stock price fell -15.5% Wednesday as AI credit bubble talk went viral.^[viii] Oracle, another AI infrastructure player some fear is over its skis, fell -8.8%.^[ix] We aren’t saying any of this is meaningful or predictive of an AI bloodbath to come. But AI bubble fears are a major brick in stocks’ wall of worry. People are on high alert for any sign of trouble. It seems natural markets would be sensitive to any seeming confirmation they were right.

Here, too, look longer term. Stocks have good days and bad, always. Returns come from the trend, not the noise. Trends go bad when sentiment gets too hot, leading investors to overlook genuinely bad indicators. Or when a huge, negative surprise wallops stocks before sentiment turns euphoric. We don’t see either today. While sentiment ran quite warm early this year, it has cooled since—as shelved or delayed IPOs illustrate. The wall of worry has plenty of bricks, especially abroad. And today’s perceived negatives—inflation and AI shenanigans—seem too widely discussed to surprise. We also think they are misunderstood. Meanwhile, we see plenty of positives to power stocks higher from here.