U.S. Inflation Data Raise Odds of Another Fed Rate Hike This Year

September’s hotter-than-expected consumer and producer inflation reports strengthened market expectations for another Federal Reserve rate increase this year, while futures pricing showed little certainty that the move would come in October.

The Consumer Price Index (CPI) rose 0.6% from August, accelerating from 0.4% that month. Annual inflation reached 3.7%, up from 3.4%. Core CPI, which excludes food and energy, increased 0.3% for the month and 2.6% over the year, above forecasts of 0.2% and 2.5%, respectively. The annual core rate was 2.4% in August.

The Producer Price Index (PPI) climbed 1.3% in September, its largest monthly increase since March 2022. It was 6.3% above year-earlier levels, the highest annual reading since December 2022.

At the Oct. 15 close, interest-rate futures showed about a 27% chance of a quarter-point increase at the Fed’s October meeting and more than 70% odds of no change. Pricing put the chance of at least one more increase this year at 70% to 80%, with December viewed as the likelier window. The Fed’s target range is 3.75% to 4.00%, following a quarter-point increase in September.

Energy accounted for much of the price pressure. Gasoline prices rose 9.1%, contributing more than half of September’s monthly CPI increase. Energy also drove more than 80% of the rise in producer prices for goods.

Some costs outside energy also increased. Shelter and services prices excluding energy each rose 0.4%. PPI services climbed 0.8%, while transportation and warehousing services increased 3.4% and trade service margins rose 1.4%. If businesses pass more of those costs to customers, producer-price pressure could reach consumer inflation in coming months.

The bond and stock moves did not treat an October hike as certain. The 10-year Treasury yield briefly topped 5.32% after the CPI release before falling. On the PPI release day, it declined to about 5.08% to 5.09%. The S&P 500 fell 1.1% on Oct. 14 and the Nasdaq dropped 1.9%; the next day, the S&P 500 gained 0.3%, the Dow Jones Industrial Average rose about 1.1% and the Nasdaq was roughly flat.

Investors will track energy prices, employment, core personal consumption expenditures inflation and financial conditions ahead of the Fed’s next rate decision.