Pound slumps as US inflation remains stuck at 3.7 per cent in September

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US inflation came in stronger than expected, driven by the costs of shelter.
Investors now bet that the Fed will hike rates again this year.

The pound slumped after new figures out today showed that US inflation remained stuck at 3.7 per cent in September, raising the chances that the Fed will be forced to hike interest rates again.

The pound was trading 0.44 per cent lower against the dollar, at around $1.2260 as traders bet it was more likely the Fed would be forced to raise interest rates again this year.

Higher interest rates tend to attract foreign investment, boosting the value of the domestic currency.

The fall in sterling’s value came after figures from the Bureau of Labor Statistics showed the consumer price index (CPI) rose 0.4 per cent month-on-month in September.

This meant the annual rate of inflation remained stuck at 3.7 per cent. Economists had expected the annual rate of inflation to fall slightly to 3.6 per cent.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the all items monthly rise,” the Bureau said.

However, core inflation – which excludes food and energy costs – rose 4.1 per cent over the last year, down from 4.3 per cent last month and its lowest level in two years.

Danie Casali, chief investment strategist at Evelyn Partners, said: “The ongoing slowdown in core inflation could go some way to counteracting the blow-out jobs report last week if the FOMC is to keep interest rates on hold when it next meets on 1 November.”

The slight increase in inflation is likely to increase the chances that the Fed will hike rates once more this year. Minutes released from the latest Fed meeting last night showed that a majority of the rate-setting committee thought a further rate hike would be necessary.

On Twitter, Mohamed El-Erian said the figures were “a reminder of the challenges of the ‘final mile’ of battling inflation, especially when core service inflation still remains an issue and there is concern about the spillover into core CPI from higher energy prices.”