Inflation runs hot and broad
U.S. consumer prices climbed 3.7 per cent last month from a year earlier, the Labor Department reported, far above the Federal Reserve's 2 per cent target and moving further away from it. Higher gasoline prices tied to the Middle East war were a primary cause. Core CPI, which strips out volatile food and energy costs, rose 2.6 per cent, exceeding the 2.5 per cent forecast by economists polled by Reuters.[S1]
According to the September figures, upward price movement was dispersed among many components instead of being driven by one product, in contrast to the previous month when wireless services caused the unexpected reading. Omair Sharif, who heads Inflation Insights, called the stronger-than-expected result broad-based. Software costs climbed 28 per cent compared with a year earlier, a record annual gain, while toy prices likewise hit an all-time high, with pressure coming from AI-related demand as well as tariffs imposed under the Trump administration.[S1]
Markets and economists shift toward a hike
Raymond James Chief Economist Eugenio Aleman wrote that broadening inflation is a poor signal for the Fed and raises the probability of a rate increase at the end of the October FOMC meeting, scheduled for Oct. 27-28. Interest-rate futures moved to roughly even odds of an October hike after the data, an unusual level of uncertainty around a Fed decision only two weeks away. Several influential Fed policymakers had recently signalled there was time to assess more data before delivering what most expect to be at least one more hike by year's end, and traders had bet heavily against a second consecutive increase under Fed Chairman Kevin Warsh, particularly a week before November elections that will determine whether Trump's Republican party keeps its congressional majorities.[S1][S2][S3][S4][S5][S6][S7][S8]
In September the Fed moved its policy rate to a 3.75-4.00 per cent target range in an effort to curb excessive inflation, and officials have said they are monitoring for evidence that price pressures are widening, which could keep inflation high even if gasoline costs decline and would call for additional tightening. Wednesday's figures provided numerous such indications. Officials are also balancing the danger of raising rates too fast and harming the labor market; unemployment has remained low, though hiring has slowed. PPHC chief economist Martin Beck said the September CPI keeps inflation worries alive because core inflation remains sticky, yet softer employment data and weak consumer sentiment leave the Fed able to hold in October.[S1]
