Key Points
- U.S. annual inflation rate rose to 3.7% in September
- The probability of the Fed raising interest rates in October has risen to nearly 45%
- Gasoline prices rise by 9.1%, and U.S. Treasury yields increase
U.S. inflation rose to 3.7% in September, higher than Wall Street's expectations, and significantly increased the likelihood of the Federal Reserve raising interest rates again before the end of October.
Data from the U.S. Bureau of Labor Statistics shows that the Consumer Price Index ( CPI ) rose by 0.6% compared to August, and the annual inflation rate increased from 3.4% to 3.7%. Economists had previously predicted an annual inflation rate of around 3.6% for September, which means that these figures once again represent a setback for policymakers trying to curb ongoing price pressures.
The financial markets reacted immediately. Reuters, citing interest rate futures data, reported that traders increased the probability of a Fed interest rate hike at its meeting on October 27-28 from around 22% before the report was released to 45%.
The U.S. CPI rate rose to 3.7%, with gasoline prices increasing by 9.1%.
Rising energy costs were the biggest driver of accelerating inflation in September, accounting for more than half of the increase in consumer prices that month.
In September, gasoline prices rose by 9.1%, a year-on-year increase of 34.2%. The broader energy index also rose by 5.2% that month, with a year-on-year increase of 20.4%, reflecting the continued impact of high crude oil prices and disruptions in supply from the Middle East.
However, inflationary pressures are not limited to energy. Excluding food and energy, the core CPI rate accelerated from 2.4% in August to 2.6% in September, showing a month-on-month increase of 0.3%.
This increase reversed the trend of August, when despite rising fuel prices, core inflation still slowed down.
Housing costs also rose by 0.4% in September, while increases in airfare, used cars, medical services, and education have collectively contributed to broader inflationary pressures.
Probability of interest rate hike almost doubles; U.S. Treasury yields rise
This overheated CPI data has rapidly reshaped market expectations regarding the Federal Reserve, with investors increasingly doubting whether policymakers will be able to maintain interest rates unchanged.
The yield on 10-year U.S. Treasury bonds rose to nearly 5.29%, and the yield on 2-year bonds also increased accordingly. Markets have begun to factor in the possibility of more restrictive monetary policies. Higher yields will increase borrowing costs and may put pressure on stock valuations, especially for growth-oriented technology companies.
This reaction continues the previous selling of U.S. Treasury yields driven by high energy prices and new concerns about inflation.
After the data was released, the US dollar also strengthened, while stock index futures weakened. Investors adjusted their expectations for interest rates accordingly.
CPI What does the report mean for the next Federal Reserve decision?
Before the meetings on October 27th and 28th, the Federal Reserve faced a difficult policy choice. Rising interest rates could help to curb inflation, but further tightening would also increase the financing costs for households and businesses.
Another complex factor is that the Federal Reserve's official inflation target of 2% is based on the Personal Consumption Expenditures ( PCE ) index, rather than CPI. However, the latest consumer price data still provide important early warnings of ongoing price pressures.
The difference between CPI and PCE is very important, as the methods used by both are different, which may lead to varying inflation readings.
