US core inflation exceeds expectations. The ripple effects of interest rates and exchange rates reaching Japan

News about US prices is not just about the United States. Through interest rates and exchange rates, it reaches Japanese companies’ procurement and investments, as well as our daily lives.

What caught my attention in this September US Consumer Price Index (CPI) report was not just the rise in gasoline prices. It was that core prices, excluding food and energy, did not settle down as much as the market had hoped.

However, it is premature to think in a straight line that ‘because US prices have risen, Japan will definitely raise interest rates.’ I would like to break down what has changed and through which channels it affects Japan.

Gasoline alone cannot explain it all

The September CPI released by the US Bureau of Labor Statistics (BLS) on October 14 showed a 0.6% increase in the headline index from the previous month and a 3.7% increase from the same month last year. The core index, excluding food and energy, was up 0.3% from the previous month and 2.6% from the same month last year. The month-on-month figures are seasonally adjusted, while the year-on-year figures are not.

Gasoline rose 9.1% from the previous month, accounting for more than half of the monthly increase in the headline index. Energy as a whole rose 5.2%, and shelter costs rose 0.4%. The month-on-month core increase was 0.3%, the same as in August, with price hikes also seen in used cars and medical care.

Source: BLS ‘September 2026 CPI’

The market forecast reported by Reuters was for a 0.2% month-on-month and 2.5% year-on-year increase in core prices. The actual results exceeded both. It was a result that makes it difficult to maintain the view that ‘inflation is slowing down smoothly.’

Source: Reuters (October 14, 2026, published on MarketScreener)

However, one cannot attribute the entire rise in core prices to ‘demand being too strong.’ There are also supply constraints and delays in reflecting shelter costs. Just because food and energy are excluded does not mean there is only one cause for price increases.

First to move is the outlook, not the policy itself

The CPI announcement is not an FRB policy decision. What moves first is the market’s outlook on ‘what will happen to interest rates in the future.’

If the stickiness of inflation is recognized, it becomes easier for expectations of additional rate hikes or prolonged high interest rates to be priced in. That change appears in government bond yields, stock prices, and the dollar. However, because there are also corporate earnings and geopolitical factors, one cannot explain a single day’s price movement solely by the CPI.

Here, I want to distinguish between policy interest rates and long-term interest rates. While the central bank determines the policy interest rate, long-term interest rates reflect future policy, price, and growth outlooks. Furthermore, even if nominal interest rates rise, if the expected inflation rate changes at the same time, the change in the actual interest rate burden will not be of the same magnitude.

When looking at the impact on Japan, one should not simply replace US rate hike expectations with the Bank of Japan’s judgment. It is necessary to separately confirm the sustainability of Japan’s wages, consumption, and prices.

It reaches the Japanese economy through exchange rates and US purchasing power

The first channel is the view on interest rate differentials and the yen exchange rate. If a rise in US interest rates is perceived, the dollar will be bought, creating pressure for the yen to weaken. If the yen continues to weaken, the yen-denominated costs of raw materials and energy purchased in foreign currency are likely to increase.

However, this does not mean that the yen will necessarily continue to weaken. If concerns about a US economic downturn intensify, interest rates could fall, and exchange rates also move due to Bank of Japan policies and capital flows. I would like to avoid the interpretation that ‘a higher-than-expected US CPI equals a guaranteed weaker yen.’

The second is US consumption and investment. If spending on gasoline and housing increases and income does not keep up, the money available for other purchases decreases. If high borrowing interest rates continue, it will also become a burden on the purchase of automobiles and homes, as well as corporate capital investment.

This ripples out to orders for Japanese products and the overseas operations of Japanese companies. Even if the yen-denominated value of sales increases due to a weaker yen, it does not necessarily mean the business has become stronger if sales volumes decrease.

When viewing GDP from the expenditure side, it is divided into consumption, investment, government spending, and net exports. What I want to look at in particular this time is how household consumption and corporate investment will change. There is a difference between an increase in expenditure due to rising prices and an increase in the actual quantity that can be purchased.

Note that the reason imports are subtracted in net exports is to exclude overseas production included in consumption and investment. This is not to say that an increase in imports itself is inherently bad for the Japanese economy.

Japanese companies cannot be judged solely by the benefits of a weak yen

For export companies, it is necessary to look at the effect of boosting yen-denominated profits in conjunction with the slowdown in US demand and the increase in local labor and procurement costs. I want to check not just sales figures, but also volumes and profit margins.

For retail and transportation, the question is to what extent the burden of procurement and fuel costs can be reflected in prices. If they cannot raise prices, profits will be squeezed, and if they do raise prices, the number of customers and purchase volumes may fall. It is important to look not only at whether price pass-through occurs, but also at the subsequent customer reaction.

Banks are not necessarily ‘better off if interest rates rise’ either. It is necessary to look at the movements of lending and deposit rates, the valuation of held bonds, and the repayment capacity of borrowers together. For IT companies, I also want to consider the impact of interest rates on stock valuations separately from the impact on the investment appetite of client companies.

What management needs to confirm is not just predicting the direction of exchange rates. It is about grasping where the burden will fall on their own company: procurement prices, sales volumes, profit margins after price revisions, and the timing of debt refinancing.

For households, the ‘gap between wages and prices’ is what matters

For households, how much they can buy with the same income is more pressing than news about stock prices or exchange rates. If the rise in import costs extends to daily necessities and wages do not keep up, disposable income will decrease.

On the other hand, the impact is not the same for all households. It varies depending on the frequency of car usage, mortgage contracts, and the composition of savings and assets. Just because US interest rates move does not mean that Japanese mortgage repayments will change uniformly from the next day.

Therefore, one cannot predict overall living expenses from the rate of price increase alone. Households need to look separately at which of their expenses are rising and whether their income is keeping up with them.

What to look at next is not just the level of prices

Is inflation rising because demand is strong? Or is it rising only because supply is constrained and quantities are not increasing? Even with the same price increase, the meaning for the economy is different.

If prices continue to rise while the economy stagnates, it is difficult for both companies and households. However, it is too early to judge it as stagflation based on a single CPI report. It is necessary to look at employment, real consumption, corporate orders and profits, and capital investment in combination.

What I want to verify in future producer prices, employment, consumption statistics, and corporate earnings is whether ‘price increases’ are beginning to turn into ‘volume decreases’.

US prices reach Japanese life. However, there is more than one way they reach us.

Interest rates change, exchange rates move, corporate profits and investments change, and beyond that lie wages and consumption. I believe that only by following these connections can we read US economic indicators as issues that affect our own work and lives.