US Inflation Disrupts Markets, Renewing Pressure on the Fed to Raise Interest Rates

The acceleration of inflation in the United States during September has shuffled the cards of financial markets, as price increases came in higher than expected, driven by persistent pressures from energy costs. Meanwhile, core inflation data heightened concerns about the difficulty of bringing prices back to the Federal Reserve’s 2% target.

The Consumer Price Index rose by 3.7% year-on-year, compared to 3.4% in August, surpassing economists’ expectations of 3.6%, according to data released by the U.S. Department of Labor. On a monthly basis, the index increased by 0.6%, in line with expectations, but this represents an acceleration from the 0.4% rise recorded in the previous month.

The most worrying signal came from core inflation, which excludes the more volatile food and energy prices; it rose by 2.6% year-on-year, exceeding expectations of 2.5%. It also increased by 0.3% month-on-month, compared to expectations of 0.2%, indicating that price pressures are not limited to fuel alone.

The data quickly impacted U.S. monetary policy expectations, with implied probabilities of an interest rate hike at the Federal Reserve’s October 27-28 meeting rising to around 40%, up from 22% before the report’s release, according to futures trading data cited by Reuters.

This means markets now see a greater likelihood of the central bank returning to monetary tightening, after previously leaning toward a rate hold at the next meeting. However, market pricing does not represent a certain decision, as the Fed’s move will remain tied to its assessment of overall inflation data, the labor market, and economic outlook.