Lower energy prices keeps headline inflation cool, but pressures beginning to bubble up in core

Consumer prices fell -0.2% (month-over-month) in September, in line with market expectations. Core CPI (excluding food and energy) rose 0.2%, slightly hotter than the consensus view.

On a year-over-year basis, overall consumer price inflation was flat (0.0%), a deceleration from August's pace of 0.2%. However, core inflation heated up slightly to 1.9% (from 1.8%) .

Consumers continue to save money at the pumps, with overall energy prices down 4.7% on the month. Energy costs are down 18% over a year ago, and are expected to save the average American household close to $900 in 2015. Only partially offsetting the drop in energy prices, food costs rose 0.4% in September.

Core goods prices rose ever so slightly in September (+0.02%), snapping a string of declines since April, but remain in deflationary territory on a year-on-year basis. Contributing to the upward pressure in September were stronger price pressures for things like recreational goods, household furnishings and supplies and alcohol.

Inflation for core services also heated up in September, rising 0.3% on the month. Among major price subcomponents, higher price pressures were fairly broad based, with shelter (+0.3%), transportation services (+0.1%) and medical care services (+0.3%) all seeing greater upward pressures in September.

Low energy prices are keeping headline inflation incredibly benign, but there are nascent signs that price pressures are starting to build up in core categories. Core services inflation is up 2.7% year/year, the hottest pace since the spring of 2014. A stronger dollar is also helping to keep core goods prices in deflationary territory, but that affect won't last forever.

The rise in core inflation suggests that it is not just external supply factors at work on inflation. Rising domestic demand is also important, and will be key to moving inflation gradually closer to the Federal Reserve's target.

"Monetary policy acts with a lag, and the Fed will not wait until it sees the whites of inflation's eyes before pulling the trigger on rate hikes. The Fed is likely to take interest rates higher early in the new year, despite recent market concerns, as outlined in our recent observation", says TD Economics.