Oct 14 (Reuters) – A Federal Reserve interest-rate decision later this month may be a closer call than previously thought, traders bet on Wednesday, after Labor Department data showed consumer prices were up 3.7% last month from a year earlier, well above the Fed’s 2% target and moving in the wrong direction.
Higher gasoline prices from the Middle East war were a main driver. Excluding volatile food and energy prices, the core consumer price index (CPI) was up 2.6%, more than the 2.5% economists polled by Reuters had projected.
Fed officials have said they are looking closely for signs of broadening price pressures that could keep inflation high even if gas prices fall, even as they have signaled they have time to weigh more data before following last month’s interest-rate increase with another one.
“The surprise was not concentrated in any one item, like it was with wireless in the August report, but instead reflected a number of components showing strength, i.e., it was broad-based,” wrote Omair Sharif, founder of Inflation Insights.
Traders had priced interest-rate futures for about a 22% chance of an October rate hike. After the report, the implied probability of a rate hike at the Fed’s October 27-28 meeting rose to around 45%, pointing to unusual uncertainty around the outcome just two weeks before the decision.
Fed policymakers will also have to weigh the risk of tightening too fast and unduly slowing the labor market.
“September CPI keeps inflation concerns alive, with core inflation still sticky, but weaker jobs data and fragile consumer sentiment mean the Fed still has room to hold in October,” PPHC Chief Economist Martin Beck said.
(Reporting by Ann Saphir; Editing by Mark Potter and Andrea Ricci )
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