Consumer prices rose more than expected in September as surging energy costs and stubborn underlying inflation complicated the Federal Reserve’s efforts to bring prices under control, according to the latest Consumer Price Index (CPI) report.
- Headline inflation increased 0.6% in September, accelerating from 0.4% in August and matching the largest monthly increase since March.
- Annual inflation jumped to 3.7% from 3.4%, exceeding economists’ expectations of 3.6% and reaching its highest level since May.
Why it matters: The bigger concern was core inflation, which excludes volatile food and energy prices. Core prices rose 0.3%, hotter than the 0.2% economists expected, while the annual rate accelerated to 2.6% from 2.4%, its highest level in three months.
- Although much of the headline increase came from energy, the core figures suggest inflationary pressures are extending beyond gasoline prices.
Energy prices explode: Gasoline prices surged 9.1% in September, accounting for more than half of the overall monthly increase in consumer prices. Fuel oil jumped an even larger 15.3%, while the broader energy index rose 5.2%.
- Over the past year, gasoline prices have climbed 34.2%, fuel oil has skyrocketed 74.2%, and overall energy costs are up 20.4%.
Other prices moving higher: Airline fares rose 1.2% in September and are now up 22.4% from a year ago. Used vehicles increased 0.7%, education costs rose 0.6%, and recreation prices climbed 0.5%.
- Shelter costs, which represent more than one-third of the overall CPI, increased 0.4%, accelerating from August’s 0.3% gain.
Some welcome relief: Food prices were unchanged in September, with grocery prices actually declining 0.1%. Dairy products fell 0.9%, including a 2.0% decline in milk prices. Beef prices dropped 1.0%, eggs fell 1.3%, and prescription drug prices declined 1.2%. Communication costs also slipped 0.2%.
Bond markets react: Treasury yields jumped following the hotter-than-expected report. The 10-year Treasury yield swung roughly 10 basis points, from down 2 basis points before the release to up about 7 basis points afterward. The selloff reflected growing expectations that the Fed could raise interest rates again before the end of the year, potentially as soon as its next meeting.
The bottom line: September’s inflation report delivered bad news for the Fed and mortgage rates. Energy accounted for much of the headline increase, but accelerating core inflation and rising shelter costs suggest price pressures remain persistent. With inflation moving further away from the Fed’s 2% target, the prospect of additional rate hikes is becoming increasingly difficult for bond investors to ignore.