US Inflation Strengthens Expectations of Tighter Federal Reserve Policy
(MENAFN) US inflation rose more sharply than anticipated in September, reinforcing expectations that the Federal Reserve would keep interest rates unchanged at its October meeting before potentially raising them by 25 basis points in December.
Monthly consumer prices increased by 0.6%, while the annual inflation rate climbed to 3.7%, its highest level in four months, according to Labor Department figures.
Core inflation, which excludes volatile food and energy prices, also exceeded forecasts, rising 0.3% from the previous month and reaching 2.6% year over year.
The Federal Reserve’s Beige Book, released Wednesday, indicated that price pressures persisted across the country and intensified in some regions, adding to concerns that inflation could take longer to return to the central bank’s target.
Financial markets reacted to the data with rising Treasury yields and a stronger dollar. The yield on the 10-year US Treasury note climbed 11 basis points to 5.33%, while the 30-year yield reached 5.63%. The dollar index advanced 0.7% to 102.94, its highest level of the year, as investors reassessed the outlook for monetary policy.
Analysts said the latest figures could encourage the Fed to maintain restrictive borrowing conditions for longer to ensure inflation continues to ease. However, opinions differ over whether policymakers will wait until December before implementing another rate increase.
Before the inflation report, a weaker employment reading had supported expectations that the central bank might pause its tightening campaign. The latest jobs data showed just 29,000 new nonfarm payrolls and an unemployment rate of 4.2%, while figures for July and August were revised downward by a combined 60,000 jobs.
The hotter-than-expected consumer price index changed market expectations. Futures data from CME Group indicated a 67% probability that the Fed would leave rates unchanged in October, compared with a 33% chance of an immediate increase.
Market pricing also pointed to a possible 25-basis-point rate hike at the Fed’s final meeting of the year in December, although the timing remained uncertain.
Padhraic Garvey, ING’s head of regional research for the Americas, said rising housing costs highlighted the upward risks to underlying inflation. He argued that the broader economic outlook was not sufficiently strong to prompt an increase in October, while expecting another hike by at least December.
Garvey also attributed much of the rise in overall inflation to higher gasoline prices. Food costs remained unchanged, while price increases in healthcare, education and communications were more limited.
Steven Kamin, a senior fellow at the American Enterprise Institute, said successive monthly increases in core inflation suggested that higher energy costs were spreading into other parts of the economy. He added that geopolitical tensions could slow the process of bringing inflation down.
Kamin said inflation could moderate once energy prices decline, but noted that the latest figures may have revived the possibility of an October rate increase, despite earlier indications from Fed officials that such a move was no longer under consideration.
The latest data have left policymakers balancing persistent inflationary pressures against signs of weakening employment, with the coming economic indicators likely to influence the timing of any further monetary tightening.
Monthly consumer prices increased by 0.6%, while the annual inflation rate climbed to 3.7%, its highest level in four months, according to Labor Department figures.
Core inflation, which excludes volatile food and energy prices, also exceeded forecasts, rising 0.3% from the previous month and reaching 2.6% year over year.
The Federal Reserve’s Beige Book, released Wednesday, indicated that price pressures persisted across the country and intensified in some regions, adding to concerns that inflation could take longer to return to the central bank’s target.
Financial markets reacted to the data with rising Treasury yields and a stronger dollar. The yield on the 10-year US Treasury note climbed 11 basis points to 5.33%, while the 30-year yield reached 5.63%. The dollar index advanced 0.7% to 102.94, its highest level of the year, as investors reassessed the outlook for monetary policy.
Analysts said the latest figures could encourage the Fed to maintain restrictive borrowing conditions for longer to ensure inflation continues to ease. However, opinions differ over whether policymakers will wait until December before implementing another rate increase.
Before the inflation report, a weaker employment reading had supported expectations that the central bank might pause its tightening campaign. The latest jobs data showed just 29,000 new nonfarm payrolls and an unemployment rate of 4.2%, while figures for July and August were revised downward by a combined 60,000 jobs.
The hotter-than-expected consumer price index changed market expectations. Futures data from CME Group indicated a 67% probability that the Fed would leave rates unchanged in October, compared with a 33% chance of an immediate increase.
Market pricing also pointed to a possible 25-basis-point rate hike at the Fed’s final meeting of the year in December, although the timing remained uncertain.
Padhraic Garvey, ING’s head of regional research for the Americas, said rising housing costs highlighted the upward risks to underlying inflation. He argued that the broader economic outlook was not sufficiently strong to prompt an increase in October, while expecting another hike by at least December.
Garvey also attributed much of the rise in overall inflation to higher gasoline prices. Food costs remained unchanged, while price increases in healthcare, education and communications were more limited.
Steven Kamin, a senior fellow at the American Enterprise Institute, said successive monthly increases in core inflation suggested that higher energy costs were spreading into other parts of the economy. He added that geopolitical tensions could slow the process of bringing inflation down.
Kamin said inflation could moderate once energy prices decline, but noted that the latest figures may have revived the possibility of an October rate increase, despite earlier indications from Fed officials that such a move was no longer under consideration.
The latest data have left policymakers balancing persistent inflationary pressures against signs of weakening employment, with the coming economic indicators likely to influence the timing of any further monetary tightening.
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