U.S. consumer prices rose in September due to higher rent and gasoline costs. However, underlying inflation is slowing, leading financial markets to expect that the Federal Reserve will not raise interest rates next month.
The consumer price index (CPI) increased by 0.4% last month, according to the Labor Department. This follows a 0.6% jump in August, the largest increase in 14 months.
Over the past 12 months, the CPI has risen by 3.7% after also increasing by the same margin in August. Year-on-year consumer prices have decreased from a peak of 9.1% in June 2022.
Economists surveyed by Reuters had predicted a 0.3% increase in the CPI and a 3.6% rise year-on-year.
Excluding the volatile food and energy components, the CPI rose by 0.3%. While used motor vehicle prices fell, the cost of rent increased. The core CPI, which excludes food and energy, also increased by 0.3% in August.
In September, the core CPI rose by 4.1% year-on-year, down from a 4.3% increase in August. The government reported on Wednesday that producer prices increased by 0.5% in September. This was due to higher gasoline and food prices, although underlying inflation pressures at the factory gate continued to ease.
Inflation is still above the Federal Reserve’s two percent target, 18 months after the central bank began raising rates.
According to CME Group’s FedWatch Tool, financial markets widely expect the Fed to keep rates unchanged at its upcoming policy meeting. This sentiment is supported by comments from top-ranking Fed officials, who stated that increased yields on long-term U.S. government bonds could deter further rate hikes.
Violence in the Middle East is also expected to discourage the Fed from tightening monetary policy further. However, it has caused Treasury yields to decrease from their 16-year highs. Since March 2022, the Fed has raised its benchmark overnight interest rate to the current range of 5.25% to 5.50%.
Despite these factors, strong demand in the economy and a tight labor market suggest that borrowing costs could remain elevated for some time. In September, the economy added 336,000 jobs, the highest number in eight months and nearly double the amount anticipated by economists.
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