Market Wire: Underlying US inflation pressures intensify, strengthening dollar

Underlying consumer prices rose more quickly than expected in the United States last month, strengthening the case for more rate hikes from the Federal Reserve, and lifting the dollar. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 0.3% in September from the prior month, maintaining the pace set in August, and climbing 2.6% relative to the same period last year, well ahead of the 2.4% consensus forecast as price pressures broadened across categories. The more-volatile all-items headline price measure jumped 0.6% from the prior month as gasoline prices soared, rising 3.7% in year-over-year terms.

The update comes as a number of conflicting forces act on the consumer price basket. According to recent Fed research, companies are still passing on tariff increases long after they were first imposed last year. Energy costs are climbing as supply disruptions in the Middle East intersect with shortages across the refined product complex to lift prices at the pump. The artificial intelligence buildout is driving up demand for raw materials and power, and immigration controls are raising labour costs, feeding through to food and services prices. But wage growth has remained subdued and consumer balance sheets are eroding, removing one of the major forces that lifted prices after the pandemic. Yesterday, New York Fed president John Williams said the central bank may need to raise its policy rate once more this year but expects inflation pressures to subside in 2027, removing the need for further hikes.

Traders are sharply raising odds on an October rate hike, Treasury yields are edging up across the policy-sensitive end of the curve, and the dollar is advancing against its major rivals. The Canadian dollar, euro, British pound, and Japanese yen are all losing altitude as rate differentials erode.

We suspect this knee-jerk reaction could fade somewhat, but there’s no question that the monetary tightening calculus has shifted. At Jackson Hole, Fed chair Kevin Warsh said the Fed would need to be confident that underlying inflation is moving to target “clearly and at sufficient speed” before shifting into neutral. September’s figures have pushed that confidence further out of reach.