Thursday's inflation report showed prices in September rose at roughly the same pace seen in August.

But when removing volatile categories like food, energy, and shelter, economists see a downward trend in price increases, a welcomed sign for a Federal Reserve that had spent the days ahead of this data indicating a bias against raising interest rates again in November.

Still, this data shows the Fed has work to do in bringing inflation back to its 2% target, keeping the possibility of an interest rate increase in December in focus for investors.

As of Thursday morning, markets were pricing in a 12% chance the Fed hikes in November, down from a 41% chance a month ago, data from the CME Group showed. The chances of a December rate hike rose, however, to 37% from 26% following the September inflation reading.

"The underlying trend in inflation is still down," wrote Michael Pearce, lead US economist at Oxford Economics, in reaction to Thursday's release. "This report will not change the message from Fed officials over recent days that they can afford to be patient."

Last Friday's jobs report showed the US labor market remains tight, with employers adding more jobs than expected while wages grew at their slowest pace in more than two years.

With rising yields and the Fed's "higher for longer" interest rate stance weighing on stocks, comments from Fed officials following the jobs report suggested many in the central bank see these market moves, in part, doing the Fed's work for them. This, the officials said, could lead to the Fed not raising rates in November.

"The downward trend in inflation remains in place, in our view," Wells Fargo senior economist Sarah House wrote on Thursday. "In addition to shelter disinflation likely to resume, easing supply chain pressures, slower wage growth and more price-sensitive consumers should help inflation continue to settle down."

But some economists see September marking three straight months of headline inflation not moving lower — while core inflation decreases stagnate — challenging the view the Fed is done for the year.

"We are not sure if there is enough time for the Fed to re-pivot before the next FOMC meeting on November 1, but this certainly increases the risk that Powell supercharges his hawkish rhetoric at the press conference, and increases market expectations for a rate hike in December," Jefferies US economist Thomas Simons wrote in a note to clients on Thursday.

A stronger than expected increase in shelter accounted for roughly two-thirds of the 4.1% increase in core inflation seen in September. As noted by several contributors to the Yahoo Finance chartbook over the summer, housing inflation is expected to turn sharply lower in the months ahead.

Simons offers a different take on shelter, though, pointing to recent reversals in rent indexes tracked by Zillow and ApartmentList that are now ticking higher again, as well as rising home prices in the US.

"This has to be a very troubling sign for the Fed," Simons wrote. "Typically, rate hikes reduce demand for shelter and put downward pressure on prices. In the current environment, rate hikes seem only to have made it more difficult and expensive for builders to add supply, perversely pushing home prices higher and dragging rents up with them."

Economists at Citi also flagged shelter as a potential issue moving forward, noting that the 0.56% increase in owner's equivalent rent was the strongest monthly gain since February.

"The acceleration in owner's equivalent rent to the strongest monthly reading since February is contrary to Fed and consensus expectations for a steady slowing," Citi's chief US economist Andrew Hollenhorst wrote in a note on Thursday.

Stocks were mixed following the report while bond yields tracked slightly higher.

"The long-awaited drop in shelter costs (rents) still hasn't arrived despite the indicators," Charles Schwab chief fixed income strategist Kathy Jones posted to X on Thursday.

"Markets are likely to be cautious until it happens."

Read more inflation coverage:

• Inflation: Consumer prices rose 3.7% over last year in September, matching August's increase

• Stock open flat as CPI inflation holds steady: Stock market news today

• Gas price increases eased but still 'major contributor' to September inflation print

• Housing costs again frustrate the Fed’s efforts to curb inflation

Josh Schafer is a reporter for Yahoo Finance.

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