Retail Sales Beat Expectations as Inflation Accelerates

This week’s economic data includes: (1) retail sales for September, (2) Consumer Price Index (CPI) for September, (3) Producer Price Index (PPI) for September, (4) weekly initial jobless and continuing claims and (5) market trends across equities, oil and Treasury markets, including changes in Fed rate expectations and a preview of next week’s key  economic releases.

KEY SUMMARY:

Retail sales beat expectations in September, but beneath the strong headline gain, higher gasoline prices drove much of the increase while underlying spending moderated, suggesting consumers remain resilient, but momentum is beginning to slow.

Retail sales rose 0.8% in September, slowing from August’s 1.3% gain but well above expectations of 0.3%. Much of the increase was driven by higher gasoline prices, with gasoline station sales jumping 6.4% and accounting for 0.55 percentage points of the overall gain. Eight of thirteen major retail categories posted monthly increases, while year-over-year retail sales growth accelerated to 6.3% from 5.6% in August.

 

Beneath the strong headline number, however, underlying consumer spending showed signs of moderation. Sales excluding gasoline rose just 0.2%, while sales excluding both autos and gasoline also increased 0.2%. The control group, which feeds into GDP calculations, rose only 0.1%, down sharply from 1.2% in August and below expectations of 0.3%. Overall, consumers remain resilient, but September’s data suggest spending momentum is normalizing after a particularly strong August.

 

September’s consumer inflation report ran hot, as surging energy prices and renewed pressure across core goods and services pushed both headline and core inflation higher, reinforcing concerns that inflation remains persistent and strengthening the case for another Fed rate hike this year.

Headline CPI accelerated in September, as surging energy costs and firmer underlying price pressures pushed inflation higher. Consumer prices rose 0.6% month over month, the largest increase since April, while year-over-year inflation increased to 3.7% from 3.4% in August. Energy was the primary driver, rising 5.2% for the month as gasoline jumped 9.1% and fuel oil surged 15.3%. Food inflation provided some relief, remaining unchanged for the month as grocery prices declined 0.1%.

 

Underlying inflation also showed renewed firmness. Core goods prices increased 0.3%, the largest monthly gain since January 2025, driven by increases in used vehicles, apparel, toys, and computer-related products. Core services inflation accelerated to 0.4%, led by higher shelter, travel, transportation, and education costs. Shelter prices rose 0.4% for the month, while year-over-year core services inflation edged up to 3.1% from 3.0%.

 

Core CPI increased 0.3% in September, unchanged from August but above expectations of 0.2%, while annual core inflation accelerated to 2.6% from 2.4%. Overall, September’s report points to broader inflationary pressure beyond the sharp increase in energy prices, with both goods and services showing renewed firmness. The persistence of underlying inflation increases the case for another Fed rate hike this year, particularly if price pressures remain elevated.

 

September’s wholesale inflation report came in significantly hotter than expected, as surging energy costs and accelerating services inflation pushed both headline and underlying producer prices sharply higher, raising the risk of further inflation pass-through to consumers and reinforcing the case for tighter Fed policy.

Wholesale inflation accelerated sharply in September, with headline PPI rising 1.3% month over month, the largest increase since March 2022 and well above expectations of 0.6%. On a year-over-year basis, PPI climbed 6.3% from 5.6% in August. The increase was led by goods prices, which surged 2.6% as energy costs jumped 10.8%, including a 20.3% increase in gasoline prices. Food prices also rose 1.2%, although core goods inflation moderated slightly to 0.3%.

 

Services inflation also strengthened, rising 0.8% in September compared with 0.2% in August, driven largely by higher trade margins and transportation and warehousing costs. Trade services increased 1.4%, while transportation and warehousing prices rose 3.4%, including increases in airline passenger services and freight transportation. On a year-over-year basis, services inflation accelerated to 4.9% from 4.7%.

 

More importantly, underlying producer inflation remained elevated beyond volatile food and energy prices. Core PPI increased 0.7% for the month and 5.0% year over year, while Super Core PPI rose 0.5% for the month and 5.0% from a year ago, with both measures exceeding expectations. Overall, the September report points to broadening producer price pressures beyond energy, raising the risk that higher business costs could eventually flow through to consumer prices and reinforcing the case for tighter Fed policy.

 

Weekly jobless claims remain historically low, with limited layoffs and declining continuing claims signaling that displaced workers are finding jobs relatively quickly and reinforcing the underlying resilience of the labor market.

Initial jobless claims edged up by 1,000 to 199,000 but remained below expectations and below year-ago levels for the 35th consecutive week, signaling that layoffs remain limited. Continuing claims also declined to 1.710 million, while the insured unemployment rate held steady at 1.0%. Overall, the data suggests that employers remain reluctant to cut workers and that displaced workers are finding new jobs relatively quickly, reinforcing the view that the labor market remains healthy and resilient.

 

Markets navigated a volatile week as a tech-led equity sell-off, surging oil prices, and persistent inflation pressures collided, driving investors into Treasuries even as markets continued to price in three additional Fed rate hikes, albeit on a slower path.

Equity markets finished mixed to lower for the week ending October 16, with technology and AI-related stocks leading the decline. The Nasdaq fell 4.5% and the S&P 500 declined 1.9%, both posting their weakest weeks since June, while the Dow managed a modest 0.7% gain. Investor sentiment was pressured by concerns that high borrowing costs could slow the pace of AI infrastructure investment, uncertainty over returns on substantial data center spending, and rising oil prices that renewed inflation concerns. Despite the weekly pullback, all major equity indexes remain positive year to date.

 

Oil prices rallied sharply as geopolitical and supply concerns intensified. Disruptions around the Strait of Hormuz, declining U.S. commercial crude inventories, and continued Ukrainian drone strikes on Russian refinery infrastructure contributed to the increase. Brent crude rose 4.9% to $109.86 per barrel, its highest close since May 19, while West Texas Intermediate (WTI) crude  surged 10.4% to $101.41, moving back above $100 for the first time since September.

 

Treasury markets were volatile as competing forces drove yields in both directions. Hot consumer and wholesale inflation data and a large federal deficit report initially pushed yields higher, but the sharp equity sell-off later triggered a flight to safety that drove investors into government bonds. By week-end, the 2-year yield declined 6 basis points to 4.74%, the 5-year fell 13 basis points to 4.89%, and the 10-year dropped 15 basis points to 5.09%, resulting in an overall flattening of the yield curve.

 

Treasury forward rates also moved materially lower across the curve, generally declining by roughly 15 to 17 basis points between October 9 and October 16. Despite the downward shift, forward curves remain upward sloping and continue to price modestly higher rates over the coming months. Markets still expect three additional 25-basis-point Fed rate hikes, with the first two anticipated in December 2026 and March 2027. However, expectations for the third hike have shifted from June to September 2027, suggesting a slower path of tightening and growing expectations that the current rate-hike cycle may be approaching its peak.

 

Looking ahead, next week’s economic calendar will provide additional insight into housing, labor market conditions, and overall business activity. Key releases include September housing starts, building permits, and pending home sales on Tuesday; weekly jobless claims on Thursday, with initial claims expected to remain near 200,000; and preliminary October S&P Global PMI readings on Friday. With inflation pressures elevated, oil prices above $100, and financial markets increasingly volatile, incoming economic data will remain important in shaping expectations for the Fed and the broader economic outlook.

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DETAILED ANALYSIS:

Retail Sales – September Update:

Overview:

Retail sales increased 0.8% month over month in September, slowing from a 1.3% increase in August and exceeding market expectations of 0.3%. The gain was primarily driven by higher energy prices. On a year-over-year basis, retail sales rose 6.3%, up from 5.6% in August.

Category Performance:
Eight of the thirteen major retail categories posted monthly increases in September.

 

Notable increases included:

 

• Gasoline stations: +6.4% MoM (+28.1% YoY), reflecting higher gasoline prices and contributing 0.55 percentage points to the overall monthly increase.
• Furniture and home furnishing stores: +1.3% MoM (+4.9% YoY), contributing 0.03 percentage points to the monthly gain.
• Food services and drinking places: +1.1% MoM (+7.0% YoY), the only service category included in the report, contributing 0.14 percentage points to the monthly increase.

 

Other categories posting monthly gains included motor vehicle and parts dealers, electronics and appliance stores, food and beverage stores, health and personal care stores, and non-store retailers. Declines were reported at building material and garden equipment dealers; sporting goods, hobby, musical instrument, and bookstores; and miscellaneous retailers.

 

Core Retails & Control Group:
Underlying measures of retail spending also slowed from August but generally met or exceeded market expectations:

 

• Retail sales excluding gasoline: +0.2% MoM, down from +1.0% in August.
• Retail sales excluding autos: +0.9% MoM, down from +1.4% in August and above expectations of +0.5%.
• Retail sales excluding autos and gasoline: +0.2% MoM, down from +1.1% in August and in line with market expectations.

 

The control group, which excludes food services, autos, building materials, and gasoline and feeds into GDP calculations, increased 0.1% in September, down sharply from 1.2% in August and below expectations of 0.3%. Overall, the data pointed to continued consumer spending growth but at a more moderate underlying pace, with September’s headline increase boosted significantly by higher gasoline prices.

 

CPI – September Update: 

The Bureau of Labor Statistics (BLS) reported that consumer prices rose 0.6% month over month in September, up from 0.4% in August, matching market expectations and marking the largest monthly increase since April. The increase was broad-based, driven by higher prices for gasoline, housing, used vehicles, toys, IT goods related to data center buildout, and transportation services. The acceleration in inflation further pressured consumer purchasing power heading into November’s midterm elections. On a year-over-year basis, CPI increased 3.7% in September, up from 3.4% in August and above market expectations of 3.6%.

 

Food Prices

Food inflation, which includes both grocery and restaurant prices, was unchanged month over month in September, down from a 0.1% increase in August. Grocery prices declined 0.1% after being unchanged in August, driven primarily by lower prices for beef (-1.0%), pork (-1.0%), eggs (-1.3%), milk (-2.0%), butter (-2.7%), and snacks (-1.6%). Food away from home prices increased 0.2%, slowing from 0.3% in August.

 

On a year-over-year basis, overall food inflation slowed to 2.5% in September from 2.7% in August. Grocery price inflation eased to 1.8% from 2.2%, while food away from home inflation edged up to 3.5% from 3.4%.

 

Energy Prices

Energy prices surged 5.2% month over month in September, accelerating from 2.1% in August and marking the largest monthly increase since March. The increase was driven primarily by higher energy commodity prices, including a 9.1% jump in gasoline prices and a 15.3% increase in fuel oil prices.

 

Within energy services, electricity prices increased 0.2% in September after declining 0.2% in August, while utility gas service prices declined 0.3% following a 1.1% decrease in August.

 

On a year-over-year basis, energy prices increased 20.4%, led by sharp increases in gasoline (+34.2%) and fuel oil (+74.2%).

 

Core Goods Prices (Excluding Food & Energy)

Core goods prices increased 0.3% month over month in September, accelerating from 0.1% in August and marking the largest monthly increase since January 2025. Notable increases included men’s and boys’ apparel (+1.1%), boys’ and girls’ footwear (+2.7%), used vehicles (+0.7%), recreational reading materials (+2.2%), toys (+4.2%), and personal computers and peripheral equipment (+1.4%).

 

Partially offsetting these gains were declines in prescription drugs (-1.2%), window and floor coverings and other linens (-2.4%), furniture and bedding (-0.8%), appliances (-0.7%), and personal care products (-0.4%).

 

On a year-over-year basis, core goods inflation remained at 0.7%, unchanged from August. Price increases were led by apparel (+3.4%), sporting goods (+4.7%), recreational reading materials (+7.0%), computer software and accessories (+28.4%), personal computers and peripheral equipment (+9.7%), and toys (+6.6%), partially offset by declines in prescription drugs (-4.5%) and smartphones (-9.9%).

 

Core Services Prices (Excluding Energy)

Core services prices increased 0.4% month over month in September, accelerating from 0.3% in August and marking the largest monthly increase since April. Shelter costs, which account for roughly 35% of the CPI basket, increased 0.4%, up from 0.3% in August. Other notable increases included hotels and motels (+2.3%), car and truck rentals (+5.4%), airline fares (+1.2%), college tuition and fees (+1.2%), and delivery services (+1.7%).

 

On a year-over-year basis, core services inflation increased to 3.1% in September from 3.0% in August. Shelter inflation rose to 3.2% from 3.0%. Other notable annual increases included hotels and motels (+4.3%), car and truck rentals (+9.1%), video and video game subscription and rental services (+14.4%), airline fares (+22.4%), delivery services (+16.2%), postage (+12.7%), streaming and video services (+10.8%), and hospital and related services (+5.4%).

 

Core CPI (Excluding Food & Energy)

Core CPI increased 0.3% month over month in September, unchanged from August and above market expectations of 0.2%. On a year-over-year basis, core CPI rose 2.6%, up from 2.4% in August and above expectations of 2.5%.

 

The hotter-than-expected core inflation readings, which exclude volatile food and energy prices, suggest that higher energy costs may be beginning to pass through to a broader range of goods and services. The persistence of underlying inflationary pressure strengthens the case for another Fed rate hike this year, particularly if broader price pressures remain elevated.

 

PPI – September Update: 

The BLS reported that the Producer Price Index (PPI) for final demand increased 1.3% month over month in September, the largest increase since March 2022, accelerating from 0.5% in August and well above market expectations of 0.6%. The sharp increase was driven primarily by higher energy costs and reinforced concerns about persistent inflationary pressures. On a year-over-year basis, headline PPI rose 6.3%, the highest rate since December 2022, up from 5.6% in August and above expectations of 5.4%.

 

Goods Prices

Goods prices, which include food and energy, increased 2.6% month over month in September, accelerating from 1.1% in August and marking the largest monthly increase since the series began in December 2009. The increase was driven primarily by energy prices, which surged 10.8% following a 4.5% increase in August and accounted for approximately 82% of the monthly increase in goods prices. Gasoline prices jumped 20.3%, while natural gas (+14.6%), home heating oil (+18.8%), and diesel fuel (+21.0%) also posted significant gains.

 

On a year-over-year basis, goods prices increased 9.8% in September, up from 7.7% in August.

 

Food prices rose 1.2% month over month in September following a 0.3% decline in August. Notable changes included:

• Fresh and dry vegetables: +41.0%
• Grains: +17.4%
• Eggs: -31.9%

Excluding food and energy, core goods prices increased 0.3% in September, moderating from 0.4% in August.

 

Technology-related pricing moderated monthly in September but remained significantly elevated from a year ago:

 

• Electronic components and accessories: -0.3% MoM (+26.8% YoY)
• Computers and related equipment: +0.1% MoM (+22.5% YoY)

 

Services Prices 

Services prices increased 0.8% month over month in September, accelerating from 0.2% in August and marking the largest increase since April. The gain was driven primarily by higher margins for trade services, which accounted for nearly 49% of the monthly increase in services prices, and higher transportation and warehousing costs, which contributed nearly 30%.

 

Key components included:

• Trade services: +1.4%, up from +0.2% in August, with notable changes in food and alcohol wholesaling (+6.7%), TV, video and photographic equipment and supplies retailing (+8.2%), and fuels and lubricants retailing (-25.0%).
• Transportation and warehousing services: +3.4%, up from +2.2% in August, with notable changes in airline passenger services (+5.0%) and truck transportation of freight (+3.8%).
• Other services (excluding trade, transportation and warehousing): +0.3%, up from 0.0% in August, with notable changes in application software publishing (+3.7%), traveler accommodation services (+5.6%) and securities brokerage, dealing, investment advice and related services (-2.0%).

 

On a year-over-year basis, services inflation increased to 4.9% in September from 4.7% in August.

 

Core and Super Core PPI

Core PPI, which excludes food and energy, increased 0.7% month over month in September, accelerating from 0.2% in August and exceeding market expectations of 0.3%. On a year-over-year basis, core PPI rose 5.0%, up from 4.8% in August and above expectations of 4.4%.

 

Super Core PPI, which excludes food, energy, and trade services, increased 0.5% month over month in September, up from 0.3% in August and above expectations of 0.3%. On a year-over-year basis, Super Core PPI rose 5.0%, up from 4.8% in August and exceeding expectations of 4.7%.

 

Overall, September’s PPI report showed a significant acceleration in producer inflation, led by surging energy costs but accompanied by broader pressure across services and underlying inflation measures. The hotter-than-expected core and Super Core readings suggest that inflationary pressures are extending beyond volatile energy prices, increasing the risk that higher producer costs could eventually pass through to consumer prices and adding to the case for tighter Fed policy.

 

Weekly Jobless Claims – Week Ending October 10:

The Labor Department reported that initial jobless claims increased by 1,000 to 199,000 for the week ended October 10, up from 198,000 the prior week but below expectations of 200,000. Claims have remained below year-ago levels for 35 consecutive weeks, underscoring the continued resilience of the labor market. The four-week moving average edged up by 250 to 198,500, well below the 224,750-level recorded a year ago, indicating that layoffs remain limited.

 

Continuing claims, which measure the number of individuals receiving unemployment benefits and provide insight into unemployed workers’ ability to find new jobs, decreased by 4,000 to 1.710 million for the week ended October 3 (reported with a one-week lag relative to initial jobless claims), down from a revised 1.714 million the prior week. The reading came in above expectations and remained well below year-ago levels. Meanwhile, the insured unemployment rate remained at 1.0%, while the four-week moving average of continuing claims fell by 1,750 to 1.709 million. Overall, the data continues to point to limited layoffs and relatively quick reemployment among displaced workers, reinforcing the view that the labor market remains healthy and resilient.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets finished mixed to lower for the week ending October 16, 2026. The Nasdaq Composite declined 4.5%, marking its worst weekly loss since June, while the S&P 500 fell 1.9%, also posting its weakest week since June. The Dow Jones Industrial Average, however, managed a slight gain. Market volatility was driven largely by a sharp sell-off in technology and AI infrastructure stocks, as investors grew concerned that high borrowing costs could slow the historic pace of AI investment, while also questioning the returns on significant data center spending. Higher oil prices added to the pressure by fueling renewed inflation concerns.

 

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -4.48% (weekly) & +12.47% (YTD), closing at 26,140
• S&P 500: -1.95% (weekly) & +11.89% (YTD), ending at 7,659
• Dow Jones Industrial Average: +0.67% (weekly) & +8.20% (YTD), closing at 52,002
• Russell 2000: -3.05% (weekly) & +9.65% (YTD), ending at 2,721

 

 

 

Oil Market

The crude oil market finished the week with a strong rally, driven by escalating Middle East supply risks amid intensified attacks and disruptions around the Strait of Hormuz, declining U.S. commercial crude inventories, and continued fuel supply constraints stemming from Ukrainian drone strikes on Russian refinery infrastructure.

 

As a result, Brent crude rose $5.14, or 4.9%, to $109.86 per barrel from $104.72 the prior week, reaching its highest closing level since May 19, 2026. WTI crude climbed $9.56, or 10.4%, to $101.41 per barrel from $91.85, moving back above the $100 threshold for the first time since September.

 

Treasury Market

Treasury yields experienced a volatile week, with the yield curve flattening overall. Hot consumer and wholesale inflation data, along with a large federal deficit report, initially pushed yields higher. However, those moves were later reversed as a sharp equity market sell-off triggered a flight to safety, driving investors into government bonds and pulling Treasury yields lower.

 

Key Treasury Yield Movements:

• 2-year yield: 4.74% (-0.06%)
• 5-year yield: 4.89% (-0.13%)
• 10-year yield: 5.09% (-0.15%)

 

As shown in the table below, Treasury forward rates declined meaningfully across the curve between October 9 and October 16. Spot rates fell 14.5 bps for the 5-year, 16.0 bps for the 7-year, and 16.2 bps for the 10-year. The decline becomes slightly more pronounced farther out on the forward curve. At January 31, 2027, the 5-year forward rate decreased 16.4 bps to 4.933%, the 7-year fell 17.4 bps to 5.019%, and the 10-year declined 17.3 bps to 5.141%. Overall, the curve experienced a broad and relatively parallel downward shift during the week.

 

Despite the decline, the forward curves remain upward sloping, with rates generally increasing as the forward date extends. As of October 16, the 5-year rate rises from 4.871% spot to 4.933% by January 31, 2027, while the 7-year increases from 4.968% to 5.019% and the 10-year from 5.085% to 5.141%. The key takeaway is that Treasury rates moved materially lower over the week, while the forward curve continues to price modestly higher rates over the coming months.

 

Forward Date	5-Year 10/9/26	5-Year 10/16/26	Change (bps)	5-Year 10/9/26	5-Year 10/16/26	Change (bps)	7-Year 10/9/26	7-Year 10/16/26	Change (bps)
pot	5.016%	4.871%	-14.5	5.128%	4.968%	-16.0	5.247%	5.085%	-16.2
10/31/26	5.034%	4.881%	-15.3	5.142%	4.976%	-16.6	5.261%	5.094%	-16.7
11/30/26	5.058%	4.902%	-15.6	5.161%	4.993%	-16.8	5.281%	5.111%	-17.0
12/31/26	5.078%	4.918%	-16.0	5.177%	5.007%	-17.0	5.298%	5.126%	-17.2
1/31/27	5.097%	4.933%	-16.4	5.193%	5.019%	-17.4	5.314%	5.141%	-17.3

Rate Expectations

A week ago, markets were fully pricing in three additional 25-basis-point rate hikes, expected in December 2026, March 2027, and June 2027. Beyond June 2027, markets were also assigning a low 20% probability of a fourth 25-basis-point hike by January 2028.

 

This week, markets continue to expect three additional 25-basis-point rate hikes. The timing of the first two hikes remains unchanged, in December 2026 and March 2027, while the third hike has been pushed out from June to September 2027, with markets now assigning an 84% probability to that increase. If all three hikes occur, the upper bound of the federal funds rate would rise to 4.75%. Beyond September 2027, markets are pricing in a modest probability of rate cuts, suggesting the current tightening cycle may be approaching its peak.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

 

Date	Economic Release	Expected	Prior
10/20 (Tue)	Housing Starts (Sep)	1.303K	1.275K
	Building Permits (Sep)	1,385K	1,403K
	Pending Home Sales MoM (Sep)	-0.5%	0.3%
10/21 (Wed)	MBA Mortgage Applications (Oct 16)		-2.7%
10/22 (Thu)	Initial Jobless Claims (Oct 17)	200K	199K
	Continuing Claims (Oct 10)	1.712MM	1.710MM
	Leading Index (Sep)	-0.1%	-0.1%
10/23 (Fri)	S&P Global US Manufacturing PMI (Oct)	55.5	55.9
	S&P Global US Services PMI (Oct)	58.0	58.8
	S&P Global US Composite PMI (Oct)	57.4	58.4

For a visual representation of this week’s economic review, you can view or download the slide deck here: 10.16.2026 CBC Weekly Economic Update Presentation Slides

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Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

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