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The US recorded tame consumer price inflation in September, reinforcing the Federal Reserve’s judgment that it can proceed carefully with further increases in short-term interest rates.

Headline consumer price growth slowed to 2.3 per cent from a year earlier, amid a drop in fuel and energy costs. That was down from the 2.7 per cent pace in August and the slowest since March. Core CPI, which excludes volatile food and fuel prices, held steady with 2.2 per cent year-on-year price growth. 

The CPI was held back by a 3 per cent month-on-month plunge in used car and truck prices, as well as retreating energy prices. The shelter component, which is a key driver of the core inflation measure, rose 0.2 per cent month on month, slower than the previous month’s 0.3 per cent rise. 

Investors had nervously awaited the latest inflation report after a spate of upbeat economic data reinforced expectations of further US rate rises and pushed up Treasury yields. That in turn has triggered a sharp sell-off in equities, with the S&P 500 suffering its worst fall in more than eight months on Wednesday.

The US central bank raised interest rates last month, as expected, and signalled it was on track for another increase by the end of this year and three more next year, as previously forecast. The Fed’s rate rises have been repeatedly denounced by US president Donald Trump, who this week stepped up his attacks by calling the central bank “crazy”

US stock-index futures turned modestly positive on the cooler-than-expected inflation readings. At the start of trading, the S&P 500 was up to 2,788, a 0.1 per cent gain, while the Dow Jones Industrial Average was down 0.15 per cent to 25,559. The Nasdaq Composite was also in the red, down slightly to 7,414.

In fixed income, yield on the 10-year Treasury note fell almost 4.7 basis points to 3.178 per cent, having traded at roughly 3.195 per cent before the CPI print. The buck was down 0.23 per cent.

Core CPI inflation has remained above the 2 per cent mark for seven months now. It is up firmly since this time last year when it was rising at a 1.7 per cent year-on-year pace. With unemployment hovering at its lowest levels since the 1960s, investors have been anxiously watching for an acceleration in inflation, which could force the US central bank to tighten policy more aggressively.

Yet Jay Powell, the Fed chair, has been signalling that he has no appetite to accelerate the pace of rate rises given expectations for continued soft inflationary pressures. Earlier this month, he cited the experience of the 1990s as he argued an acceleration of wage growth need not trigger too much inflation. The link between tight labour markets and inflation had been “greatly reduced”, although not eliminated, in recent decades, he said.

“Overall, these data support our baseline view of a gradual pick-up in inflationary pressures,” said Kathy Bostjancic at Oxford Economics. “Barring a rapid escalation of trade tensions that would disrupt economic activity, we foresee another Fed rate hike before the end of the year.”

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