September's US inflation report is set to look alarming on the surface and calm underneath. Consumer prices are expected to post their sharpest monthly increase since April when September CPI data is released on Wednesday, driven almost entirely by energy, while underlying inflation is forecast to stay subdued. The split leaves the Federal Reserve to decide which reading to believe ahead of its October policy meeting.

The report, due at 12:30 GMT (8:30 ET), is the last inflation print before the Fed's October 27-28 meeting.

Headline set for energy-led jump

The market expects headline CPI to climb 0.6% on the month, according to Westpac's calendar, up from 0.4% in August. The consumer price index, compiled monthly by the Bureau of Labor Statistics, tracks the average change in prices paid by US consumers for a basket of goods and services. That would lift the annual rate to around 3.7% from 3.4%, a four-month high. The Cleveland Fed's inflation nowcast points in the same direction, signaling an increase of about 0.5% for the month and 3.6% on the year.

Energy is the main driver

Analysts expect energy prices to jump around 5.5% in September, led by gasoline, which would be the largest energy contribution since March. The pressure has been building for months: in August, gasoline prices were already up more than 27% from a year earlier. Food prices, by contrast, are expected to stay subdued.

The inflation risk extends well beyond this single release. Brent crude remains above $100 a barrel, and fresh attacks on Saudi infrastructure have kept supply disruption in focus as the Iran war's energy shock feeds into consumer prices. Wednesday's report offers a direct read on how far that shock has traveled into US consumer prices, and a hot energy component would reinforce the link between crude risk and Fed policy.

Core expected to tell a calmer story

Core inflation, which strips out food and energy — the categories that swing the most from month to month — is forecast to rise around 0.2% on the month, slower than August's 0.3%, keeping the annual core rate steady at 2.4%. Because it filters out those volatile swings, the core rate is widely treated as the cleaner gauge of underlying price momentum, and it is the figure markets and policymakers tend to anchor on when weighing rate expectations. The Federal Reserve targets 2% inflation over the longer run.

August's core reading was boosted by a one-off jump in telephone services following a methodology change, and analysts expect volatile items such as hotel prices and used cars to correct. Airfares are the exception, rising as jet fuel costs pass through to ticket prices.

An awkward spot for the Fed

The Fed raised its target range to 3.75%-4.00% on September 16, but the odds of a follow-up move at the October 27-28 meeting fell to around one in four after September payrolls showed only 29,000 jobs added. That tension reflects the Fed's dual mandate of price stability and maximum employment, with the two goals currently pulling in different directions: headline inflation is running well above target even as hiring has cooled. Markets still largely price a December hike.

Goldman Sachs had expected one more increase in October, though that view assumed oil would fall toward $85, and Brent remains above $100.

A firm core reading alongside the energy-driven headline would likely revive the October hike pricing that faded after the weak payrolls report, while a soft core would reinforce expectations of a December move. Treasury markets are likely to trade the core number rather than the headline: a soft core would favor the front end of the curve and weigh on the dollar. Gold, meanwhile, would likely benefit from a soft core and lower yields.

What comes next

Thursday's producer price index, which tracks wholesale-level costs and can offer an early read on where consumer prices are headed, and retail sales, a broad gauge of household spending, will round out the picture before Fed Chair Kevin Warsh speaks at the IMF meetings in Bangkok early Friday, his final scheduled appearance before the October meeting.