NEW YORK, Oct 14 (Reuters) –
US consumer prices accelerated in September with a surge in gasoline costs putting an interest rate increase later this month back on the radar.
The Consumer Price Index rose 0.6% last month after climbing 0.4% in August, the Labor Department’s Bureau of Labor Statistics said on Wednesday. In the 12 months through September, the CPI advanced 3.7% after rising 3.4% in August.
Economists polled by Reuters had forecast the CPI would gain 0.6% over the month and increase 3.6% on a year-over-year basis. Gasoline prices soared 7.1% in September, data from the US Energy Information Administration showed.
Excluding the volatile food and energy components, the CPI gained 0.3% in September, matching the gain in August. In the 12 months through September, core CPI inflation increased 2.6% after advancing 2.4% in August. The US central bank tracks the Personal Consumption Expenditures Price Index for its 2% inflation target. The core CPI measure is lagging core PCE inflation, which increased 3.0% in August, because of the different weights assigned to the components in the baskets.
MARKET REACTION:
STOCKS: U.S. stocks were headed lower, with the Nasdaq opening down 0.6% and the S&P 500 off 0.4%.
BONDS: Yields rose sharply as investor expectations of a rate hike jumped. U.S. two-year yields, which are sensitive to the outlook for interest rate moves, rose 13 basis points to 4.92%
FOREX: The U.S. dollar index was up 0.55% to 102.75, an 18-month high.
COMMODITIES: Gold fell 1.6% to $4,088 an ounce.
RATE BETS: Futures that settle to the Fed’s policy rate are pricing about a 49% chance that the central bank will keep the policy rate in its current 3.75%-4% range at its meeting in two weeks, up from 19% before the report.
COMMENTS:
ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH IN FAIRFIELD, CONNECTICUT:
“The market was preparing for it already. We’re seeing higher inflation signs all over at the grocery store and at the gas pump, especially diesel prices. Nobody really believes that the Federal Reserve is in an interest-rate hiking cycle. They think this is just a few rate hikes, and we’re over and done with.”
JAMES MCCANN, SENIOR ECONOMIST, INVESTMENT STRATEGY AT EDWARD JONES, BOSTON:
“Today’s CPI report will add to the Fed’s concerns around the inflation picture. Headline inflation at 3.7% is the fastest seen since May, with a renewed rise in global energy prices feeding quickly through into the U.S. economy.
“However, perhaps more worrying is the recent pick-up in core CPI inflation, which excludes these volatile items and is now up 3.4% annualized over the past three months. In September we saw broad based price increase for autos, air fares, education and recreation contribute to a stronger than expected core reading, potentially signaling some stickiness in underlying inflation.
“The Fed won’t panic in the face of these numbers, but the data will add to conviction on the FOMC that policy needs to be tighter to help drag inflation back to target. Many Fed speakers have signaled that there is no need for a hike at the upcoming October meeting, and it would be a surprise to see them change course based on this data point alone. However, firmer inflation supports our view that the Fed will raise rates again in December, and once more in 2027.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, NORTHLIGHT ASSET MANAGEMENT, CHARLOTTE, NORTH CAROLINA:
“The numbers are coming in a little bit higher than expected. Clearly that continues to put pressure on the Fed to raise interest rates. Running slightly above target is what’s going to force their hand at the end of the year. They’re going to hold this month. No raise in October, but they will probably raise rates in December.
“Higher-than-expected inflation was a disappointment for markets and could keep pressure on interest rates, after yields had eased somewhat ahead of the data.”
DONALD CALCAGNI, CIO, MERCER ADVISORS, DENVER, COLORADO:
“No real surprises in today’s report with energy costs pushing inflation higher. The real concern is those energy costs are filtering into everything else — core inflation came in above expectations.
“I don’t think this leads the Fed to raise more than the 0.25% that’s already priced in, but longer-term yields are likely headed higher. The 10-year is close to 5.3% on the news. For investors, the combination of inflation, geopolitics and growing U.S. government credit risk are making bonds great again, in the sense that higher yields give bonds greater diversification power.
“Kevin Warsh’s job just got a lot harder, if you could imagine such a thing. With the market already pricing in three rate hikes — one more this year and two next year — the assault on Fed independence is likely to accelerate, that would only push yields higher.
“One thing to watch: computer software and accessories were up 25% yoy. That’s off the charts and indicative of the data center boom. So, I think there are interesting signs of a connection here between the AI boom and inflation.”
SHAWN SNYDER, ECONOMIC STRATEGIST, POTOMAC FUND MANAGEMENT, BETHESDA, MARYLAND:
“The report matched the previously reported ISM data with both manufacturers and service-providers suggesting that input prices jumped in September.
“This is clearly not the direction the Fed wants to see, particularly with core inflation ticking upward. However, we doubt this changes current expectations for just one rate hike between now and year end. Most likely in December.
“Next year remains an open question with the impact of tariffs and high energy prices likely to start mechanically rolling off due to base effects. Energy prices could still be high next year, but when compared to the height of the conflict in March and April 2026, they could start to pull inflation lower on a year-on-year basis in early 2027.
“It would not be surprising to see the Fed hike once more this year, then pause in early 2027 to see what happens with base effects.”
JEFFREY ROACH, CHIEF ECONOMIST FOR LPL FINANCIAL, CHARLOTTE:
“Inflation pressures are broadening beyond energy, suggesting the last mile back to target could remain bumpy and keep interest rates elevated. The latest report complicates the Fed’s decision this month, as the road back to price stability is looking increasingly difficult to navigate.”
ADAM SARHAN, CHIEF EXECUTIVE, 50 PARK INVESTMENTS, NEW YORK:
“The (stock) market is selling off. Investors are not happy with the report because that puts pressure on the Fed to raise rates to combat inflation. Right now inflation remains public enemy number one for the market and for the Fed. Tech stocks are selling off, and we’re going to see some pressure on small caps, mid-caps, interest-rate sensitive areas of the market…The real question now becomes will there be relief on the inflation front… Right now, energy prices are going up, not down. The market is looking for some relief.”
PETER ANDERSEN, FOUNDER, ANDERSEN CAPITAL MANAGEMENT, BOSTON:“The CPI reading is hotter than expected, but I don’t think it’s enough to fuel another interest-rate hike. There is developing anecdotal data suggesting consumer confidence is weakening and consumers are not enjoying as favorable an environment as before. Those factors need to be added to the overall picture of how the consumer is doing”
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, NEW YORK:
“It certainly does increase the odds of the Fed raising rates at the October meeting but I still believe that they’re not going to raise rates because we have never had two rate hikes within two months of midterm election years.
“I would tend to say that because inflation does not appear as if it’s running away and the Fed has already indicated that it is going to take a more of a hawkish approach to inflation. It certainly increases the likelihood of a rate hike in December.”
GEORGE BROWN, SENIOR ECONOMIST AT SCHRODERS, LONDON:
“While energy prices might be grabbing the headlines, today’s report suggests the inflation problem runs much deeper. A stronger-than-expected core inflation reading adds to mounting evidence that domestic price pressures are becoming more entrenched, rather than easing.
“Markets are right to assume that policy will need to become much more restrictive to return inflation to target. The question is whether the Fed is prepared to tighten as much as the inflation outlook demands.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“The inflation news this morning is not comforting by any means, It shows that inflation did accelerate from the previous month and remains a problem for the Fed. That said, although they might not raise interest rates this month, there’s a good possibility that the Fed may have to increase by 50 basis points in December.
“Why am I saying that? Because oil prices remain stubbornly high and they are continuing to move higher. President Trump’s announcement of a deal with Russia is certainly not going to bring diesel prices down by very much. And there’s the possibility that if this war continues, WTI could go back into the triple digits.”
ANSHUL SHARMA, CHIEF INVESTMENT OFFICER, SAVVY WEALTH, NEW YORK:
“Inflation rose to 3.7% in September, up from 3.4% in August. We believe the important piece here is that underlying price pressures are broadening beyond energy. Gas prices drove more than half of the monthly jump, but core inflation rose 0.3% for a second straight month and is now running at 2.6% over the year, above expectations.
“Shelter picked up to 0.4%, airfares keep climbing as fuel costs get passed through, and goods prices firmed too. We think that puts an October rate hike back on the table, and investors should be prepared for more volatility in bonds and rate-sensitive stocks until the Fed’s October 28 decision. For long-term investors, staying diversified matters more than reacting to any single data point.”
(Reporting by Lucia Mutikani, Laura Matthews, Caroline Valetkevitch, P. Avinash, Joel Jose, Darshan Kumar, Tharuniyaa Lakshmi, Stephen Culp, Anand Gopal, Rashika Singh; editing by Colin Barr)
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