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Inflation surprises to upside, weighing on risk sentiment

US consumer inflation accelerated more than expected last month, helping lift market expectations for at least one more move in the Federal Reserve’s tightening cycle. According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 3.7 percent in September from the same period last year, up 0.4 percent on a month-over-month basis. This was slightly hotter than consensus estimates among economists polled by the major data providers ahead of the release – which were set at 3.6 percent and 0.3 percent, respectively. 

A rise in housing costs contributed more than half the monthly gain, and gasoline prices provided most of the remainder of the jump. 

With highly-volatile food and energy components excluded, prices rose 0.3 percent on a month-over-month basis in September, up 4.1 percent over the previous year, and aligning perfectly with consensus forecasts.  

Equities are tumbling and short-term Treasury yields are rising as markets raise odds on a final rate hike this year, and push rate cut expectations forward in 2024. The dollar is pushing higher against its major counterparts. 

Bottom line: We expect next month’s headline print to subside as falling gasoline prices weigh on the all-items calculation, and we think the Federal Reserve is done hiking rates for this cycle. But with the Israel-Hamas conflict raising headline inflation risks, we suspect today’s number will help keep implied policy rates in restrictive territory for longer, raising the risk of a sharper slowdown in the US and global economies by the first quarter of 2024.  
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