Accelerating US inflation fuels hawkish Fed expectations

US inflation accelerated faster than expected and further cemented expectations that the Federal Reserve will hold rates this month before a 25-basis-point hike in December.

US monthly inflation rose 0.6% in September, and annual inflation hit a four-month high of 3.7%, according to the Labor Department’s data.

Core inflation, excluding food and energy prices, exceeded expectations by rising 0.3% month-on-month and 2.6% on an annual basis.

The Fed’s Beige Book released Wednesday showed price pressures remained and intensified in some regions of the country.

The US 10-Year Treasury bond yield rose 11 basis points to 5.33% and the 30-year yield hit 5.63% following the data release.

The US dollar gained 0.7% and reached 102.94, its highest of the year, due to the expectations of a tighter monetary policy environment.

Analysts believe the Fed may keep its monetary policy tight for longer to ensure price stability before hiking rates once more this year. But some said it is uncertain whether the bank will wait until December for the next rate hike.

While a weaker-than-expected jobs report showing 29,000 new nonfarm payrolls and a 4.2% unemployment rate fueled expectations that the Fed may pause rate hikes, the hotter consumer price index (CPI) data drove CME (Chicago Mercantile Exchange) Group futures indicating a 67% possibility that the bank will maintain rates this month, alongside a 33% probability of an immediate rate hike.

The July and August nonfarm payrolls were downwardly revised by 60,000.

Market pricing suggests the Fed may hike rates by 25 basis points at its final meeting of the year in December.

Padhraic Garvey, head of regional research for the Americas at ING, told Anadolu that rising housing costs confirmed the upward risks to core inflation. But the overall economic outlook is not strong enough to prompt the Fed to hike rates in October, expecting a rate hike by at least December.

Garvey added that the sharp rise in gas prices was the driver of headline inflation, noting that food prices remained unchanged and price movements in health care, education and communications were more limited.

Steven Kamin, a senior fellow at the American Enterprise Institute, stated that consecutive monthly increases in core inflation showed that mounting energy costs spilled over into other sectors, and that geopolitical tensions could lead the disinflationary process to take a longer time to take effect.

Kamin noted that inflation is likely to ease once energy prices fall, adding that while Fed officials previously took a rate hike possibility in October off the table, the recent data may have brought it back.