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U.S. inflation in September was higher than expected, raising the possibility that the Federal Reserve will raise interest rates following equally strong recent data on the job market.
According to the Bureau of Labor Statistics, the consumer price index increased 3.7% annually, unchanged from the previous month. Economists had expected a slight decline.
On a monthly basis, inflation fell to 0.4% from 0.6%, partly due to lower energy price pressures. However, excluding volatile energy and food prices, “core” inflation was stable at 0.3% month-on-month.
Core inflation fell to 4.1% year-on-year from 4.3%.
Investors and policymakers will parse the data given the lack of consensus on the likely path for monetary policy for the rest of the year.
Many investors have been willing to ignore the recent rebound in headline inflation because it has been driven by energy prices. However, last week’s stronger-than-expected jobs data raised concerns that inflation could slip above the Fed’s 2% target.
The data pushed U.S. Treasury yields to their highest levels in 16 years and briefly raised investor expectations that the Federal Reserve will raise interest rates again before the end of the year.
Yields have retreated in recent days, and as futures markets suggest, the likelihood of another rate hike this year has dropped to around 30%. Several Fed officials said rising Treasury yields could help tighten financial conditions without the central bank needing to raise interest rates again.
U.S. stock index futures fell into negative territory and Treasury yields rose following the release of September consumer price index (CPI) data. The two-year Treasury yield, which moves in line with interest rate expectations, rose 0.07 percentage point to 5.08%, but remained within its recent trading range. Traders have slightly increased their bets that the Fed will raise interest rates again before the end of the year, although odds remain around 50/50.
The federal funds rate has risen from near zero in March 2022 to 5.25-5.5%. When the Fed held its most recent policy meeting in September, officials favored raising rates again before the end of the year and then slowly lowering rates over the next two years.
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