US Inflation Rises to 3.7% in September, Boosting Fed Rate Hike Odds to 45%

US inflation accelerated to 3.7% in September, exceeding Wall Street expectations and sharply increasing the probability of another Federal Reserve interest rate hike before the end of October.

The Consumer Price Index increased 0.6% from August, while annual inflation climbed from 3.4% to 3.7%, according to the Bureau of Labor Statistics. Economists had expected annual inflation of approximately 3.6%, making the September reading another setback for policymakers attempting to contain persistent price pressures.

Financial markets responded immediately. Traders increased the probability of a Federal Reserve rate hike at the October 27-28 meeting from approximately 22% before the report to 45% afterward, according to interest-rate futures data cited by Reuters.

Higher energy costs were the largest contributor to September's inflation acceleration, accounting for more than half of the monthly increase in consumer prices.

Gasoline prices climbed 9.1% in September and were 34.2% higher than a year earlier. The broader energy index increased 5.2% during the month and 20.4% annually, reflecting the continued impact of elevated crude oil prices and Middle Eastern supply disruptions.

However, inflationary pressure was not confined to energy. Core CPI, which excludes food and energy, accelerated from 2.4% in August to 2.6% in September, while rising 0.3% month over month.

The increase marks a reversal from August, when core inflation had slowed despite rising fuel prices.

Shelter costs also increased 0.4% in September, while prices for airline fares, used vehicles, medical services and education contributed to broader inflation pressure.

The hotter CPI reading triggered a rapid repricing of Federal Reserve expectations, with investors increasingly questioning whether policymakers can afford to leave interest rates unchanged.

The benchmark 10-year Treasury yield climbed toward 5.29%, while the two-year yield also advanced as markets priced in the possibility of tighter monetary policy. Higher yields make borrowing more expensive and can place pressure on equity valuations, particularly among growth-oriented technology companies.

The response extends an existing Treasury yield selloff driven by expensive energy and renewed inflation concerns.

The US dollar also strengthened following the release, while stock-index futures weakened as investors adjusted expectations for interest rates.

The Federal Reserve faces a difficult policy choice ahead of its October 27–28 meeting. Raising interest rates could help contain inflation, but further tightening would also increase financing costs for households and businesses.

Another complication is that the Fed's official 2% inflation target is based on the Personal Consumption Expenditures index, rather than CPI. Nevertheless, the latest consumer-price figures provide an important early warning about persistent price pressures.

The distinction between CPI and PCE matters because their different methodologies can produce different inflation readings.