U.S. Inflation Rises to 3.7%, Putting Another Fed Rate Hike in October Back on the Table
September CPI rose 0.6% on the month and 3.7% year over year, above expectations, driven by gasoline. Core inflation also beat forecasts, and the odds of a Fed rate hike in October rose to about 54%.
U.S. Inflation Surprises to the Upside and Complicates the Fed's Path
The U.S. Bureau of Labor Statistics (BLS) released September's Consumer Price Index on Wednesday, October 14, and it came in hot again. Consumer prices rose 0.6% on the month and annual inflation reached 3.7%, above the 3.6% economists expected and up from 3.4% in August. Core inflation, which excludes food and energy, also beat forecasts: +0.3% on the month and 2.6% year over year, versus 0.2% and 2.5% expected. The upshot: the odds that the Federal Reserve raises rates again at its October 27-28 meeting rose to about 54%, according to the CME FedWatch tool.
Gasoline Leads the Way
Energy was the main driver of the increase:
- The gasoline index jumped 9.1% in September, accounting for more than half of the monthly CPI increase.
- Energy prices rose 5.2% on the month and are up 20.4% over the past year.
- Shelter, the largest component of the basket, rose 0.4%, up from 0.3% in August.
The energy spike has a well-known cause: the war with Iran and attacks on tankers in the Strait of Hormuz, which in recent weeks have kept oil trading around $100 a barrel.
Why Core Inflation Is the Real Worry
If the jump were limited to gasoline, the Fed could treat it as temporary. What's worrying markets is that core inflation has accelerated too. As Carson Group strategist Sonu Varghese put it, the report "wasn't just fuel prices": core inflation ran at a 3.7% annualized pace in September, well above the Fed's 2% target. The pickup in shelter supports that reading: some of the inflation is starting to spread beyond energy.
A Tough Call for the Fed
The Federal Reserve raised rates on September 16 for the first time in more than three years, to a 3.75%-4.00% range, and most officials were already projecting another quarter-point hike before year-end. Today's data brings the question forward: October or December?
- According to CME FedWatch, the odds of a hike at the October 27-28 meeting rose to about 54% after the report.
- At the same time, part of the market still expects the Fed to skip October and hike in December, according to CNBC.
With the market split almost down the middle, every comment from Fed officials over the next two weeks could move expectations.
Market Reaction
Bonds. The 10-year Treasury yield rose 9 to 10 basis points to about 5.30%-5.32%, up from 5.21% the day before and its highest since October 8. On October 7, it had touched 5.365%, its highest since April 2002.
Stocks. Wall Street traded lower, led by tech. At midday, the S&P 500 was down 0.69% at 7,751.74 and the Nasdaq was down 0.92% at 26,955.01, while the Dow was roughly flat. Among notable movers, BlackRock rose about 2% after beating earnings estimates, and IonQ fell about 6% after announcing a share sale.
Data Snapshot
| Indicator | August | September | Forecast |
|---|---|---|---|
| Headline CPI (year over year) | 3.4% | 3.7% | 3.6% |
| Headline CPI (month over month) | — | +0.6% | — |
| Core CPI (year over year) | — | 2.6% | 2.5% |
| Core CPI (month over month) | — | +0.3% | +0.2% |
| Gasoline (month over month) | — | +9.1% | — |
| Energy (year over year) | — | +20.4% | — |
| Shelter (month over month) | +0.3% | +0.4% | — |
| Market | Value |
|---|---|
| 10-year Treasury yield | ~5.30%-5.32% (+9-10 bp) |
| S&P 500 (midday) | 7,751.74 (-0.69%) |
| Nasdaq (midday) | 26,955.01 (-0.92%) |
| Odds of an October Fed hike | ~54% |
Sources: U.S. Bureau of Labor Statistics (BLS), CNBC, U.S. News, Fox Business and Kiplinger for CPI; CNBC and Quartz for the 10-year yield; CME FedWatch (via CNBC) for Fed odds; TheStreet, Yahoo Finance and Investrade for stocks. Stock figures are midday readings: the October 14 close was not available at the time of writing. This article does not use Alpha Vantage data.
Meanwhile in Spain: Inflation Confirmed at 4.9%
On the same day, Spain's National Statistics Institute (INE) confirmed its final September CPI: 4.9% year over year (the highest since February 2023), with the HICP at 5.0% and core at 3.1%, unchanged from the flash estimate. The cause is the same as in the U.S.: fuel prices. By region, Castilla-La Mancha and Galicia posted the highest rates (5.5%) and the Canary Islands and Aragón the lowest (4.4%).
Key Dates and Levels to Watch
- October 27-28, Fed meeting: with odds around 54%, the decision is wide open; a hike would take rates to 4.00%-4.25%
- The 10-year yield at 5.365%: breaking above the October 7 high would push yields to levels not seen since 2002
- Oil: as long as it stays around $100, energy will keep pushing headline inflation higher
- Upcoming core inflation data: if the 3.7% annualized pace repeats, the Fed will have a harder time justifying a pause
- Earnings season: with BlackRock, Goldman Sachs and JPMorgan already out, investors will watch whether companies can protect margins as rates and inflation rise
What It Means for Investors
A hotter-than-expected inflation print usually sets off a chain reaction: higher odds of rate hikes, higher bond yields and pressure on stocks, especially tech names, whose valuations depend more on future earnings. Heavily indebted companies and rate-sensitive sectors such as real estate also tend to suffer.
The key over the coming weeks will be separating the inflation that comes from energy, tied to the war with Iran and which could reverse if oil prices fall, from the inflation that is spreading through the rest of the economy. It's the second kind that will determine how many more hikes the Fed needs.
Conclusion
U.S. inflation rose to 3.7% in September, driven by a 9.1% jump in gasoline prices, and core inflation surprised to the upside at 2.6% year over year. The data reopens the possibility of another Fed rate hike in October, with odds of about 54%, and has pushed the 10-year yield back above 5.30%. With inflation also at 4.9% in Spain and oil around $100, the energy shock from the war with Iran is still setting the pace for central banks on both sides of the Atlantic. The Fed's October 27-28 meeting will be the next big test for markets.