Instant View: Gas and shelter costs send US consumer prices higher in Sept

NEW YORK (Reuters) - U.S. consumer prices increased in September amid higher costs for rent and gasoline, but underlying inflation is slowing, supporting financial market expectations that the Federal Reserve would not raise interest rates next month.

The consumer price index (CPI) increased 0.4% last month, the Labor Department said on Thursday. The CPI jumped 0.6% in August, which was the largest increase in 14 months.

In the 12 months through September, the CPI advanced 3.7% after rising by the same margin in August. Year-on-year consumer prices have come down from a peak of 9.1% in June 2022.

MARKET REACTION:

STOCKS: S&P 500 futures slightly pared gains after the data and were last up 0.1%

BONDS: The yield on 10-year Treasury notes moved higher and was last up 1.7 basis points at 4.614%; The two-year U.S. Treasury yield was up 5.5 basis points at 5.0602%.

FOREX: The dollar index strengthened and was last up 0.290%, with the euro down 0.31% to $1.0584.

COMMENTS:

STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL

"An increase in the headline rate of CPI, which will be disappointing but not entirely unexpected, given that fuel prices had been trending higher over the month. And it is also largely reflecting what the PPI numbers had suggested yesterday, which showed upwards pressure from energy prices plus food. These things are unlikely to be repeated going forward; indeed, energy prices have already started to fall.

"So when you factor in these reversals we are already seeing, plus the increase has some as no real surprise, then I think that explains why the market reaction is not larger. On a more encouraging note, the core rate has continued to fall, down to 4.1% on an annual basis while the monthly reading is unchanged at 0.3%. This does suggest that core inflation remains heading in the right direction, but that some of the downwards momentum we had been seeing is stalling. The Fed will be wanting to see a consistent monthly reading of 0.2%.

"Overall, there is probably not enough in the report alone to suggest to the FOMC that it needs to be tightening policy again in November, but it will see it as justifying its message that policy needs to remain 'tighter for longer', with the prospect of another rate rise still being kept on the table."

ART HOGAN, CHIEF MARKET STRATEGIST, B RILEY WEALTH, BOSTON

"This is much more of a knee-jerk reaction when we get a single data point that has so much importance.

"The headline numbers always get the most attention, but it is probably important to look at the core because that's what the Fed uses to make any decisions. So, I think that the Fed’s going to find themselves to be overly restrictive by the first half of next year and their next move likely at monetary policy will be to cut rates gradually into the second half."

ANTHONY SAGLIMBENE, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, MICHIGAN

“The headline (number) was a little bit hotter than expected, but core inflation dropped (year-on-year).

“Overall, inflation is coming down. It's moderating in the components that the Fed wants to see, which is core inflation.

So I think this means that the Fed's work in terms of raising interest rates is done. They're likely to leave interest rates higher for longer like they're messaging, and as long as inflation continues to moderate slowly at these levels, I don't think we'll see another interest rate increase this year.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN“The headline number was a little hot, but the details were not. Goods excluding food and energy have had a four-month run of deflation. Shelter costs rose, but that’s something everyone has learned to ignore since it’s a meaningless number artificially constructed. The data don’t support a rate hike November 1 and it’s highly unlikely incoming data will support rate hikes after that. Now the debate should be about how long the Fed can hold rates where they are. It might not be as long as feared.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

“The Fed, in my opinion is going to remain on hold and probably a little bit more weary of where inflation is settled. CPI is still headed in the right direction, but markets are just not quite sure yet, and the market doesn't seem to be liking it. I do think that in the long run they (the Fed) will pause at the next meeting and there won't be any more rate hikes.

“Inflation is bit more sticky and with energy prices continuing to rise, inflation is likely to hang around. If the majority of today's CPI report is a result of higher energy prices, then you can't raise interest rates in order to counteract a rise in energy prices because it's production supply that is forcing oil prices up.”

DOUGLAS PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS, CANADA

"At the margin this US CPI came in a little bit stronger than expected. It's really not that surprising following yesterday's high side surprise in the PPI and the underlying inflation was basically as advertised, so it's a mild disappointment. I don't think it really changes the broader picture by any means. There are a few moving parts beneath the surface that I think more or less offset each other.

"I doubt many people will be changing their medium term inflation outlook based on this number. It's pretty much as expected with a slight highlight surprise. I think perhaps what the message that really drives home is getting  inflation back to 2% is not going to be easy.

"We still had core prices rising by 0.3% which is on the strong side from a longer term perspective. I think it more just drives home the recent narrative that interest rates are likely to say fairly high for a long period of time and until the Fed can really break the back of inflation."

GINA BOLVIN, BOLVIN WEALTH MANAGEMENT, BOSTON

"The CPI headline is hotter than expected but the surge in yields, rising gas prices and terrorist attack on Israel will allow the Fed - and the market - to tolerate this data. I think they will pause in November."

(Compiled by the Global Finance & Markets Breaking News team)