U.S. INFLATION IS RUNNING HOTTER THAN HEADLINE FIGURES SUGGEST
The U.S. September CPI data exceeded expectations in both headline and core inflation. Although the rounded figures appeared close to forecasts at first glance, the decimal-level details revealed that price pressures were stronger than the market had anticipated. Following the release, the dollar index began to rise as investors increased their expectations for a Fed rate hike.
UNROUNDED FIGURES CHANGE THE PICTURE
According to BLS data, headline CPI rose 0.649% month over month in September. Market expectations stood at 0.58%. Although the rounded figure was reported as 0.6%, making it appear broadly in line with expectations at first glance, the actual increase was notably higher than forecast.
The biggest surprise came from core inflation, which the Fed monitors closely. Core CPI, excluding food and energy, rose 0.335% month over month, compared with expectations of 0.21%. This means monthly core inflation exceeded expectations for the second consecutive month. In August, monthly core CPI was also reported at 0.3%, against expectations of 0.2%.
ANNUAL INFLATION CLIMBS TO 3.7%
Annual headline inflation rose from 3.4% in August to 3.738%. Annual core inflation also ended its three-month declining streak, increasing from 2.446% to 2.564%.
Indicator: Headline CPI – Monthly
Actual: 0.649%
Expected: 0.58%
Previous: 0.40%
Indicator: Headline CPI – Annual
Actual: 3.738%
Expected: 3.6%
Previous: 3.40%
Indicator: Core CPI – Monthly
Actual: 0.335%
Expected: 0.21%
Previous: 0.29%
Indicator: Core CPI – Annual
Actual: 2.564%
Expected: 2.4%
Previous: 2.446%
FUEL PRESSURES DRIVE THE HEADLINE FIGURE
Energy prices are behind the sharp increase in headline inflation. In the U.S., gasoline prices climbed to $4.41 per gallon in early October, reaching a record high for the month and rising approximately 40% year over year. In the August data, the gasoline index increased 3.9% month over month and 27.4% year over year. However, the fact that core inflation also exceeded expectations indicates that price pressures are not limited to energy and are beginning to spread into services.
ONE OF THE RARE UPSIDE SURPRISES IN THE PAST TWO YEARS
The September reading also stands in sharp contrast to the trend of the past two years. Across the 23 CPI reports released since October 2024, monthly core inflation exceeded expectations only four times and came in below expectations 11 times. With the September report, the number of upside surprises has risen to five, and it is notable that two of them have occurred in consecutive months. The “inflation below expectations” pattern that markets had grown accustomed to for an extended period is now showing signs of reversing.
THE DOLLAR RISES AS RATE HIKE EXPECTATIONS STRENGTHEN
Following the release, the Bloomberg Dollar Spot Index climbed to its highest level since November. Short-term U.S. interest rate futures fell, while investors increased their bets on the Fed resuming rate hikes.
Before the release, futures markets had priced in a 17%–20% probability of a rate hike at the October 27–28 FOMC meeting and approximately an 85% probability of at least one hike by December. The Fed’s policy rate remains in the 3.75%–4.00% range, and projections from the September meeting pointed to another quarter-point hike by year-end. Fed Governor Christopher Waller also warned last week that persistent inflation could become entrenched in expectations.
The household outlook is also concerning. In the University of Michigan survey, one-year inflation expectations rose to 4.7%, while five-year expectations increased to 3.5%. This development could lay the groundwork for a tougher Fed stance against the risk of inflation expectations becoming unanchored.
MARKET IMPLICATIONS
The fact that both headline and core inflation exceeded expectations has brought the possibility of a surprise rate hike at the October meeting back into consideration. A stronger dollar and rising rate expectations could create short-term pressure on cryptocurrency and stock markets. For gold, the focus may shift to the balance between demand for inflation protection and the upward pressure from rising real yields.
Markets will now focus on the Fed’s Beige Book, scheduled for release today at 21:00 TRT, followed by Thursday’s producer price index (PPI) and retail sales data. However, the main focus will remain on the Fed’s October 28 decision and whether the acceleration in core inflation proves persistent.