US consumer inflation accelerated in September, with the consumer price index (CPI) rising 0.6% on a seasonally adjusted basis, pushing the annual rate to 3.7%, according to the Bureau of Labor Statistics. The monthly increase matched economist forecasts, but the annual figure came in slightly above the 3.6% expected. Core CPI, which strips out volatile food and energy prices, climbed 0.3% for the month and 2.6% year over year, both exceeding projections of 0.2% and 2.5% respectively.
The acceleration was largely driven by a 9.1% jump in gasoline prices, which accounted for more than half of the monthly increase in the overall CPI. The broader energy index rose 5.2% in September, following a 2.1% gain in August. Shelter costs also continued to climb, with the index up 0.4% for the month, slightly faster than the 0.3% increase seen in August. Food prices were flat overall, with food away from home rising 0.2% while food at home dipped 0.1%.
The hotter-than-expected inflation data has shifted market expectations for Federal Reserve policy. According to CME Group's FedWatch Tool, the probability of a quarter-point rate hike at the Fed's October 27-28 meeting jumped from around 22% before the report to 43% afterward. However, some economists argue that the September figures may not be enough to trigger an immediate move, given the volatile energy and oil dynamics tied to the conflict in Iran.
Joseph Brusuelas, principal and chief economist at RSM US, noted that the September CPI data provided little evidence of disinflation, suggesting more than one additional rate hike may be needed. He pointed to stubborn and sticky inflation that is unlikely to fall below 3% in headline CPI, PCE, or core PCE anytime soon, which would demand a higher policy rate. However, he added that the data is probably not sufficient to push the Fed to hike at its October meeting, with a 25-basis-point increase more likely in December to close out the year.
Stephen Brown, chief North America economist at Capital Economics, said the upside surprise in core CPI was broad-based rather than due to temporary factors, bringing an October hike back into play and presenting upside risks to the forecast of just two more 25 bp hikes from the Fed.
The inflation report comes amid growing concerns about the cost of living, with recent surveys showing a deterioration in consumer sentiment and a decline in President Donald Trump's approval rating. A Reuters/Ipsos poll found that about 78% of Americans blamed Trump's policies, including tariffs and the US-Israeli war with Iran, for rising prices that are outpacing wages.
Financial markets reacted to the data with stock futures falling and Treasury yields climbing. The 10-year Treasury yield rose more than six basis points to 5.278%, while the 30-year yield gained over two basis points to 5.59%, both having reached 24-year highs last week.
The Fed raised its benchmark interest rate by 25 basis points last month to a range of 3.75% to 4.00%, its first increase in three years, and signaled further hikes ahead. Before the CPI report, expectations for an October increase had weakened following underwhelming payroll gains in September and cooler-than-expected PCE inflation readings for July and August.
While the Fed monitors CPI alongside other indicators, the Commerce Department's personal consumption expenditures (PCE) price index remains its primary measure for forecasting and policymaking. The September PCE figures are due later this month, providing policymakers with another assessment of inflation as they determine the pace and scale of further rate increases.
This article is for informational purposes only and does not constitute financial advice.
