We had the September inflation report this morning. Headline CPI  jumped to 3.7%.

Let's take a look under the hood.

As you can see in the chart above, this is the same rate-of-change in prices we had in September 2023 (+3.7%).

But it's a very different inflation.

In 2023, rents were a heavy economic burden. Shelter alone added 2.4 points to the inflation rate. Car insurance added another half point. Both of these CPI components were lagging features of an asset price boom.

Those were sticky price pressures. The kind the Fed can lean against.

Today, the biggest driver is energy. It added 1.4 points to the 3.7%. Gasoline alone added more than a full point.

Meanwhile, the old drivers are fading. Shelter has cooled to 1.1 points. Car insurance prices are down 5% from a year ago. And core inflation, which strips out food and energy, is 2.6%.

So this isn't an overheating economy.

It's a war. It's an energy shock that started on February 28.

The Fed can't pump oil. And raising rates into an energy shock doesn't bring gasoline prices down. It squeezes everything else.

The bond market seems to understand that. The 10-year yield went down today, not up.

That said, there is a real risk with persistently high gas prices, and the Fed's Beige Book spelled it out today. Higher fuel costs are being passed "throughout the supply chain." Contracts and hedges that kept costs stable are expiring. And workers are asking for cost-of-living raises.

Wages are what gets the Fed's attention. That said, higher wages driven by higher productivity can be non-inflationary. The Fed should do nothing to disrupt that. But higher wages driven by the perception of embedded higher costs in the economy, that's where Fed policy comes in. 

Under a Warsh-led Fed, let's hope the former gets more attention than it would under the old Fed regime.