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U.S. Inflation in September Exceeds Economists' Expectations, Surging by 3.7%

by Riley Cook

US inflation continued to surge in September, reaching 3.7%, a rate exceeding economists' expectations and remaining well above the Federal Reserve's 2% target.

As the central bank evaluates whether to implement another interest rate hike by year-end, the Consumer Price Index (CPI) delivered concerning data in line with August's 3.7% reading. This figure slightly surpassed the 3.6% increase anticipated by economists, according to statistics from the Bureau of Labor Statistics published on Thursday.

Month-to-month, the pace of inflation decelerated to 0.4% in September from 0.6% in August. This slowdown can be attributed in part to reduced pressure from energy prices. However, the core CPI, a crucial metric that excludes volatile food and energy prices and is closely monitored by policymakers to gauge long-term trends, remained steady at a 0.3% month-to-month increase and surged 4.1% year-on-year, in line with forecasts.

Although the September CPI indicates a decrease from the peak of 9.1% inflation observed in June 2022, it still significantly exceeds the Fed's 2% target. Consequently, stock futures declined before the market opening, with traders increasingly expecting another rate hike – odds rose to about 50%, up from 30% earlier in the week.

Olu Sonola, Head of US Regional Economics at Fitch Ratings in New York, commented on the situation, stating, "The bigger picture is that the trend is still quite encouraging, but the fight continues." He further noted that Fed officials may consider extending the pause in rate hikes to December due to the recent increase in long-term interest rates.

The data revealed that the gasoline index experienced a 2.1% advance, contributing significantly to the overall CPI. Additionally, the data indicated that shelter's 0.2% increase accounted for over half of the overall increase. Gasoline prices had risen dramatically the previous month, with the average price per gallon reaching $3.85, according to AAA. As of Thursday, the average price per gallon in the US was $3.65, as reported by AAA.

Despite volatile energy prices, the robust labor market has raised concerns that inflation may persist. September's employment report revealed a surprising addition of 336,000 jobs in the US, nearly double the expected 170,000 jobs, contradicting the notion that the Fed may ease its aggressive tightening policy.

The central bank raised rates by 25 basis points to a 22-year high in August, aiming to combat the high inflation that peaked last summer. The current benchmark federal funds rate ranges from 5.25% to 5.5%. In the previous month, Fed officials decided unanimously to maintain this record-high rate for the second time this year.

Thanks to the strong labor market, the US economy has managed to avoid a downturn, with the Fed no longer predicting a recession by year-end. However, economists and analysts remain cautious and are closely monitoring the situation for any signs of a deeper, underlying issue.

US Bank of America Securities economist Stephen Juneau commented, "We must wait for more data to see if this is just a blip or if there is something more fundamental driving the increase." He pointed out that higher rent increases in larger cities might offset softer increases in smaller cities.

The decision to raise rates one more time this year will depend on whether inflation needs another push or if it is on track to reach 2% on its own. NerdWallet data analyst Elizabeth Renter noted, "It's increasingly looking like the latter." Fed Chair Jerome Powell has emphasized a data-dependent approach, leaving further interest rate hikes before year-end uncertain.

The markets reacted with unease prior to the release of the jobs report, declining by more than 1% when the Labor Department revealed that job openings had increased to 9.61 million in August, up from 8.9 million in July, according to the Job Openings and Labor Turnover Summary.


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