Higher September Inflation Raises Odds of Fed Rate Hike in October

Traders see a 54% chance that the Federal Reserve raises rates at the Oct. 28 meeting after Wednesday's hotter-than-expected September inflation figures. The probability was 20.7% a day earlier, according to 30-day fed funds futures tracked by CME FedWatch. The probability was 24.1% a week ago, according to the same tool. Expectations on Tuesday had favored holding rates, waiting for more data and allowing the midterm elections to pass.

The Bureau of Labor Statistics said the consumer price index rose 0.6% in September after 0.4% in August, matching forecasts. Annual inflation climbed to 3.7% from 3.4%, above the 3.6% economists expected. Gasoline prices rose 9.1% during September and accounted for more than half of the overall increase. The energy index gained 5.2%.

However, core inflation was the figure that moved markets. Core CPI, which excludes food and energy, rose 0.3% in September against a 0.2% forecast. Annual core inflation rose to 2.6% from 2.4%, above the 2.5% consensus forecast. The Bureau of Labor Statistics said recreation, used cars and trucks, education, airline fares, medical care and apparel prices all rose during September.

The debasement concern centers on the continuing loss of the dollar's purchasing power when a central bank allows inflation to persist. Real interest rates, defined as interest rates minus inflation, fall if inflation rises above the Fed's 2% target while the central bank holds rates unchanged. Savers then earn less in real terms for holding dollars. Some money moves into assets that cannot be printed, such as gold and other precious metals.

Robin Brooks, senior fellow at the Brookings Institution, said a spike in wireless services drove last month's core reading and gave the Fed a reasonable excuse to pause. Brooks said the latest reading makes an October rate increase a possibility again. Brooks argued that failing to raise rates would allow debasement to prevail. Brooks said the odds of a rate increase would be higher if the October meeting did not fall immediately before the midterm elections. The elections take place on Nov. 3. Brooks said a decision not to raise rates would be a major catalyst for gains in gold and precious metals.

Jeffrey Roach, chief economist at LPL Financial, said inflation pressures are broadening beyond energy into categories including apparel and autos. Roach said new and used vehicle prices have risen for three consecutive months, reversing the trend from earlier this year. Roach said inflation pressures are becoming more widespread as the Middle East conflict continues.

Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said core prices showed widespread gains, including in computers and smartphones. Vanden Houten said price pressures related to AI construction are spreading to consumer goods. Vanden Houten said September's larger-than-expected core CPI increase raises the odds of a Fed rate increase later this month. Oxford Economics forecasts a rate increase this month.

Treasury yields rose across the curve on Wednesday. The two-year yield, the maturity most sensitive to Fed policy, climbed 10 basis points to 4.90%. The 10-year yield rose about 7 basis points to 5.29%. The 10-year yield remained below the 5.34% reached earlier this month, the highest level since 2002. The 30-year yield added 4 basis points to 5.60%.

The U.S. Dollar Index, which measures the dollar against six major currencies, gained 0.5% to 102.73. Gold, tracked by SPDR Gold Shares, fell 1.5% to about $4,100 an ounce. Silver dropped 3.7% to $56.95. Bitcoin slipped 0.2% to around $82,870. The S&P 500, tracked by the SPDR S&P 500 ETF Trust, fell 0.7% minutes after the open in New York.