US Inflation Hit 3.7% in September, Above Forecasts

what happened

Consumer prices rose 3.7% in September from a year earlier, up from August's 3.4% gain and above the 3.6% forecast by economists surveyed by WSJ. The Labor Department published the figures on Wednesday. Core inflation, which excludes food and energy, rose 2.6%, against analysts' expectation of 2.5%.

Fed Chairman Kevin Warsh has said he does not want to set interest rates based on a single month's reading. Still, economists are watching the report closely, since it could shift market expectations for the path of rates. At its last meeting the Fed raised rates for the first time in three years, and most policymakers expect one more increase this year.

Strong consumer demand is one reason inflation remains above the Fed's target. Low unemployment and rising stock prices keep households spending, which makes it easier for businesses to pass on higher costs. Commerce Department data showed inflation-adjusted consumer spending up 2.6% from a year earlier in August.

why it matters

For markets, inflation running above target raises the chance of tighter Fed policy, which feeds into Treasury yields and the dollar. Regions Financial chief economist Richard Moody argues that supply factors, including the closure of the Strait of Hormuz, tariffs and worker shortages, are a bigger driver. Data-center construction is also lifting semiconductor prices, and Cleveland Fed President Beth Hammack said builders show "much less price sensitivity and much greater sense of urgency around delivery," so higher rates may do little to restrain that pressure.

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