US consumer inflation accelerated in September, with rising gasoline prices accounting for more than half of the monthly increase, adding to pressure on the Federal Reserve to continue raising interest rates.
The consumer price index (CPI), a broad measure of the cost of goods and services across the US economy, rose a seasonally adjusted 0.6% in September, taking the annual inflation rate to 3.7%, the Bureau of Labor Statistics reported Wednesday.
Economists surveyed by Dow Jones had expected monthly inflation of 0.6% and an annual rate of 3.6%.
The annual increase was larger than the 3.4% rise recorded in the 12 months ending in August.
Core CPI, which excludes volatile food and energy prices, rose 0.3% during the month and 2.6% over the year.
Economists had expected respective increases of 0.2% and 2.5%.
Core inflation had risen 2.4% in the 12 months ending in August.
Gasoline prices drive monthly increase
Energy prices were the main contributor to September’s inflation increase.
The gasoline index jumped 9.1%, accounting for more than half of the monthly rise in the overall CPI.
The broader energy index increased 5.2% after rising 2.1% in August.
Shelter costs also continued to climb, with the index rising 0.4% in September, compared with a 0.3% increase in August.
Food prices were unchanged during the month. Food away from home became 0.2% more expensive, while the index for food consumed at home declined 0.1%.
The inflation report comes amid growing concerns about the cost of living, with recent surveys showing a further 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 on imports and the US-Israeli war with Iran, for rising prices that are outpacing wages.
Treasury yields climb as rate expectations shift
Financial markets reacted to the inflation data with stock futures falling and Treasury yields rising.
The 10-year Treasury yield climbed more than six basis points to 5.278%, while the 30-year yield rose more than two basis points to 5.59%.
Both yields had reached new 24-year highs last week.
The figures could complicate the Federal Reserve’s efforts to balance persistent inflation against signs of weakness in the labour market.
The Fed raised its overnight benchmark interest rate by 25 basis points last month to a range of 3.75% to 4.00%, marking its first rate increase in three years.
It also signalled further increases in borrowing costs in the months ahead.
Before the CPI report, financial markets had assigned roughly a 22% probability to a rate hike at the Fed’s October 27-28 meeting, according to CME Group’s FedWatch Tool.
The probability of a quarter-point hike in October is now a 43% chance.
Expectations for an October increase had weakened following underwhelming payroll gains in September and cooler-than-expected personal consumption expenditures inflation readings for July and August.
Economists had been expecting the central bank to raise rates again in December.
Rate hike in October or December?
The latest inflation figures reinforced concerns that price pressures are proving difficult to contain.
“The September CPI data provided little in the way of disinflation evidence. This points towards more than one additional rate hike from the Fed,” said Joseph Brusuelas, principal and chief economist at RSM US.
“The problem is not an accelerated broadening out of inflation. The problem is stubborn and sticky inflation that is not going to decline below 3% in topline CPI, PCE or more importantly core PCE anytime soon which will demand a higher policy rate,” he said.
Stephen Brown, Chief North America economist at Capital Economics, said the upside surprise to core CPI in September was broad-based rather than due to any obvious temporary factors, therefore bringing an October rate hike back into play and presenting upside risks to the forecast for just two more 25 bp hikes from the Fed.
However, Brusuelas added that the September figures were unlikely to be sufficient to prompt an immediate increase in borrowing costs at the Fed’s October meeting.
“The data, which captures volatile energy, oil and distillate dynamics due to the war in Iran, is likely not sufficient to push the Fed to hike rates at its October meeting. That will wait until December where we see a 25-basis point hike to close out the year.”
Fed officials monitor CPI alongside several other inflation indicators, but the Commerce Department’s personal consumption expenditures (PCE) price index remains the central bank’s primary measure for forecasting and policymaking.
The PCE figures for September are due later this month, providing policymakers with another assessment of inflation as they determine the pace and scale of further interest rate increases.
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