September Inflation Rose More Than Expected On Higher Housing, Energy Costs

The Labor Department’s Consumer Price Index (CPI) in September, led by higher housing and energy costs, came higher than analysts had expected, adding to concerns about the possibility of another interest rate hike by the Federal Reserve.

The CPI data released Thursday showed that prices in September increased 3.7% year-over-year and 0.4% on a monthly basis, slightly higher than the 3.6% annual, and 0.3% monthly, pace of inflation that analysts had forecast. The September annual reading matches August’s year-over-year pace of 3.7%, but is a drop from August’s month-over-month increase of 0.6%.

Increased housing costs were a leading contributor to higher prices, the Bureau of Labor Statistics said, making up more than half of the monthly rise in inflation, while gasoline costs also pushed inflation higher, with the energy index rising 1.5% over the month. Prices of food, both at home and outside, also rose.

Core CPI, which strips food and energy costs, showed a 0.3% increase in prices on a monthly basis in September, the same reading as August, and a 4.1% annual increase in core CPI, down from August’s 4.3% year-over-year core reading. The core results were in line with analyst projections.

What's In Store For Rates?

Stock futures gave back some of their earlier gains while Treasury yields rose on the news as market participants weighed the impact that the latest inflation data could have on the Fed's decision-making process. The Fed has been raising rates steadily to contain inflationary pressures.

Despite the higher-than-expected headline inflation numbers, market participants still believe the U.S. central bank is likely to keep its benchmark Federal Funds rate at its current range of 5.25% to 5.5% when it deliberates its next interest rate decision on Nov. 1. The CME’s FedWatch Tool, which forecasts rate hikes based on fed futures trading data, was showing a 87.4% probability that the Fed would hold rates steady, compared with 12.6% chance of a 25 basis point hike.

Federal officials are looking at the consumer price index, along with other data on inflation and economic conditions, before making a decision on interest rates. After the Fed kept the federal funds rate steady at its September meeting, Fed Chair Jerome Powell indicated that officials would continue to monitor data before deciding on their next course of action.

Since then, some Fed officials have said that interest rates appear to be sufficiently high and more time is needed to see the effects of the Fed’s interest rate hike campaign in an effort to tame surging inflation. The Federal Reserve has raised rates from near zero in March 2022 to their current level, a 22-year high, by hiking it over the course of 11-straight meetings before holding the rate steady at its September meeting.