US inflation rises as rising costs fuel Fed rate hike fears
It is not solely limited to petrol. It encompasses the vehicle maintenance, the medical consultation, the airfare, the technological enhancement, and the wardrobe refresh. Inflation increased at a rate that exceeded expectations last month, with price pressures manifesting more broadly than anticipated, as indicated by new data from the Bureau of Labour Statistics released on Wednesday. The latest Consumer Price Index indicated a 0.6% increase in prices for September compared to the previous month, resulting in an annual inflation rate of 3.7%. This marks an increase from 3.4% in August and exceeds economists’ forecasts of a 3.6% rise. A closely monitored indicator of underlying inflation exhibited stronger-than-anticipated performance last month: Core CPI, which omits the more erratic food and energy prices, increased by 0.3% from August and 2.6% year-over-year (forecasts had anticipated rises of 0.2% and 2.5%, respectively). Inflation is rising at an unsettling pace, diminishing the pay increases for Americans, exacerbating affordability issues, and maintaining the economy – along with the Trump administration’s management of it – as a focal point for voters ahead of the midterm elections. “We’re in a world now of inflation at 3.7% and wage gains for the typical American at 3%; that’s a big gap,” said Heather Long. “The inflation pressures are in quite a few areas, and it’s tricky to cut back. The anger about the economy that many Americans feel has justification.”
The ongoing energy shock stemming from the Iran war persists in affecting the economy. Petrol prices, which increased by 9.1% in September, were responsible for over half of the monthly rise, as indicated in Wednesday’s report. “You see the energy crisis causing used car prices to rise, and airfare prices to rise, and recreation costs to rise; and on top of that, you’ve got medical care and apparel also rising,” Long said. “So, it’s this more broad-based problem than just a gas price spike.” The price increases across various categories outside of food and energy were the most concerning aspects of Wednesday’s report, according to Gregory Daco. Core goods prices increased at the most rapid pace observed since January 2025, he stated. Moreover, certain categories have experienced monthly price increases that extend even further back: The 1.1% increase in men’s and boys’ apparel prices represents the most significant rise since April 2024, while the 4.2% increase in toy prices marks the highest recorded level, according to data. “They don’t necessarily appear to be tariff-driven,” he said. “What appears to be driving some of these core price pressures is perhaps a greater desire by businesses to pass on higher costs.”
Wednesday’s report also reflected the significant impact of substantial investments in AI-related infrastructure. Prices for computer software and hardware are experiencing their most rapid annual increases on record. Housing-related inflation, encapsulated within the broad and significant “shelter” category, increased by 0.4% from August, marking the most rapid pace in five months, according to BLS data. Rents increased at a five-month-high rate of 0.4%, likely reflecting the impact of a US housing market immobilised by affordability challenges and 7.5% mortgage rates, according to Long. However, some of the most pronounced increases in the category were observed in lodging. Alongside the increase in hotel room rates, inflation in services was further elevated by rising costs associated with hospital visits, nursing home care, rental cars, tuition, sporting events and intra-city transportation, according to Daco. Those increases are partly driven by demand, stemming from continued spending by a segment of consumers who are more resilient to price shifts, as well as being reflective of higher diesel costs, he stated.
According to Long from Navy Federal Credit Union, American consumers face significant challenges in avoiding elevated prices. “People are having to skimp on something; and for a lot of Americans, that’s the grocery store … they trade down to the store brands, eat a little less meat in order to have enough money to pay all their bills,” she said. Grocery prices exhibited a modest decline of 0.1% in September’s CPI report compared to August, serving as a positive aspect amidst the overall data. To what extent that lasts remains to be seen: Analysts anticipate that sharply higher diesel prices could lead to an increase in food costs. Inflation is projected to stay high until year-end, continuing to diminish Americans’ spending power, according to Daco of EY-Parthenon. “What we are living through is really an erosion phenomenon, an income erosion phenomenon,” he said. Wednesday’s data indicates that the Federal Reserve is moving further away from its 2% inflation target, as measured by the Personal Consumption Expenditures price index. This development could lead policymakers to consider another interest rate hike if price pressures continue to be a concern.
The broadening of price pressures beyond the pump “bolsters the case for additional rate hikes,” Jeff Schulze wrote in a note Wednesday. However, he noted that recent commentary from Fed officials suggests the bar for such a move could be high when policymakers meet later this month to decide on borrowing costs. Stocks declined while bond yields increased following the report, which bolstered traders’ anticipations that the Fed will maintain elevated interest rates for an extended period to curb inflation. The 10-year Treasury yield increased by eight basis points, reaching 5.3%. On Wednesday morning, the probability of a Federal Reserve rate hike in October increased to 49%, a significant rise from the previous day’s 22%, as reported by CME FedWatch. Market participants broadly anticipate that the Federal Reserve will implement at least one interest rate increase prior to the conclusion of the year.
