US CPI Inflation Climbs To 3.7%, Putting An October Fed Hike Back In Focus

US CPI inflation increased to 3.7% in September, from 3.4% in August, higher than the expectations (Bloomberg Median poll at 3.6%). Also, core inflation picked up to 2.6% from 2.4% in August, indicating that price pressures are broadening. On a month-on-month basis, headline inflation edged up to 0.6% from 0.4% in August, while core CPI increased 0.3%, unchanged from the previous month. The increase in headline CPI was led by a sharp rise in energy prices, contributing over 60% to the monthly rise in inflation. Renewed geopolitical tensions in the Middle East, alongside the ongoing Russia–Ukraine conflict, continue to add volatility in global energy markets, posing as major upside risk to inflation.

Energy Prices Drive Inflation Higher, While Food Prices Remain Contained For Now

Energy prices accelerated to 20.4% year-on-year (16.3% in August) and 5.2% month-on-month (2.1% in August). Gasoline, which accounts for 52% of the energy index, rose 34.2% year-on-year.

On the other hand, food inflation eased marginally to 2.5% from 2.7% in August, although pressures remained uneven across categories. Food-at-home inflation stood at 1.8%, compared with 3.5% for food away from home. However, elevated energy and fertilizer costs could raise agricultural production and transportation expenses, while weather-related risks add further upside pressure to food inflation.

Core Inflation Edged Higher, Led By Core Services

Core CPI rose 0.3% month-on-month in September, unchanged from August, while annual core inflation increased to 2.6% from 2.4%. While core commodities inflation remained soft at 0.7%, core services inflation was higher at 3.1%. Shelter costs, which accounts for ~45% of the core segment, witnessed a sequential increase of 0.4%, up from 0.3% in August. Elevated mortgage rates, continue to weigh on housing affordability, which could keep shelter costs under pressure for an extended time. Beyond housing, transportation services also added to core inflation, led by higher airline fares and vehicle maintenance costs, while medical care services recovered from August’s decline. Continued price increases across these categories could further slow the moderation in underlying inflation.

Market Reaction

Higher-than-expected US CPI weighed on risk assets, with the S&P 500 and Nasdaq 100 falling by 1.1% and 2.0% respectively. Gold and silver also declined by 1.1% and 6.1%, respectively, as inflationary pressures reinforced concerns over the Fed’s rate trajectory.