US consumer inflation climbed at a more-than-expected pace last month on both sequential and annual bases, raising bets that the Federal Reserve's next interest rate reduction won't be as aggressive as the one it delivered in September. The consumer price index increased 0.2% in September, the same as in July and August, according to the Bureau of Labor Statistics.
The latest reading was ahead of the 0.1% forecast in a Bloomberg-compiled survey. Annually, inflation cooled to 2.4% from August's 2.5% but was above the 2.3% Wall Street consensus. Core inflation, which excludes the volatile food and energy components, grew by 0.3% in September, the same as in August but ahead of analysts' 0.2% forecast.
At the annual level, core inflation came in at 3.3%, above the 3.2% Bloomberg consensus. "A second straight high-side surprise in the core CPI will have the Fed questioning its aggressive start to the easing cycle," BMO Capital Markets Senior Economist Sal Guatieri said. "Inflation still has some spark." The Fed lowered its benchmark lending rate by 50 basis points last month, compared with a Bloomberg-compiled consensus that had indicated a quarter-percentage-point reduction. Monthly food price growth quickened to 0.4% from 0.1% in August, while energy prices declined 1.9% following a 0.8% decrease, the BLS report showed.
Annually, food prices increased 2.3% while the energy index dropped 6.8%. Rent growth simmered month to month while a wider range of services, notably education, auto insurance, airfares and medical care, contributed to the upside surprise in inflation, Guatieri said. Shelter cost growth decelerated to 0.2% sequentially from 0.5% and rose 4.9% annually.
Shelter and food accounted for 75% of the overall monthly increase, the BLS reported. "This is not what the Fed wanted to see after its bold move in September and virtually rules out another large cut in November," Guatieri said. "While we still lean toward a quarter-point reduction, much will depend on whether we see a second straight strong jobs report in October." The market probability that the Fed lowers interest rates by 25 basis points in November climbed to 87% on Thursday from about 80% on Wednesday, according to the CME FedWatch tool.
The chance of the central bank holding rates steady cooled to 13%..