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Market Wire: Core Inflation Accelerates More Than Anticipated, Raising Rate Expectations

Core US consumer prices climbed by more than expected in September, hitting a four-decade high as inflation pressures broadened across most services sectors. According to data released by the Bureau of Labor Statistics this morning, the headline consumer price index rose 8.2 percent in September from the same period last year, up 0.4 percent on a month-over-month basis. Economists polled by major data providers ahead of the release expected an 8.1 percent annual gain and a 0.2 percent increase relative to August.

A -2.1 percent month-over-month drop in energy prices — helped by an -4.9 percent tumble in the gasoline sub-index — failed to offset increases in food and other categories in driving the all-items index higher.

With highly-volatile food and energy components excluded, core prices rose 6.6 percent year-over-year, up 0.6 percent over the prior month. This was substantially above the 0.4 percent increase markets had expected.

Services inflation did most of the heavy lifting, contributing roughly 3.9 percentage points to the headline print. As expected, shelter costs kept rising, increasing 0.7 percent in the month as rents and owners equivalent measures moved up. Overall non-energy services inflation increased 0.8 percent, with transportation up 1.9 percent, and medical care 1.0 percent higher. Airfares jumped 0.8 percent after declining in the prior month.

New vehicle prices ratcheted 0.7 percent higher after rising 0.8 percent in August, and the index for used cars and trucks fell -1.1 percent.

Two- and ten-year bond yields jumped upward after the data hit the wires, sending the dollar bulldozing through the currency markets. Equity futures are falling vertically, commodity-linked currencies are tumbling, and the euro is down almost half a percent. Odds on a 75 basis point hike at the early-November Federal Reserve meeting remain at near-certain levels, and terminal rate expectations are climbing, putting ten-year yields on a trajectory that could take them above the 4-percent threshold.

The British pound is holding roughly half the gains generated earlier this morning when a number of major media outlets reported the Truss administration was exploring ways to unwind the highly-controversial package of unfunded tax cuts announced a few weeks ago. The sterling-dollar exchange rate jumped almost 1.5 percent before tumbling on the US inflation data.

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