US inflation tops expectations in sign Federal Reserve has more work to do

US inflation climbed higher than expected on a monthly basis in September in a sign the Federal Reserve’s series of steep rate hikes are failing to tame the toughest price pressures.

Inflation hit 0.4 per cent last month, above Wall Street’s expectations of a 0.2 per cent increase and higher than August’s print, figures from the US Labour Department showed.

On an annual basis, prices climbed 8.2 per cent, down slightly from August.

Wall Street opened sharply lower on the news. The S&P 500 collapsed 2.7 per cent, the tech-heavy Nasdaq fell 2.9 per cent and Dow Jones dropped 1.65 per cent.

The hotter than forecast figures indicate Fed chair Jerome Powell and co’s three successive 75 basis point rate rises are failing to materially impact rising prices.

Last night, minutes from the Fed’s latest meeting indicated the world’s most influential central bank will stick to the pace of rapid policy tightening, meaning a fourth 75 basis point rise in a row could land in early November.

Yields on US treasuries, America’s equivalent of UK gilts, fired higher on the news. Rates on 10-year treasury climbed 17 basis points, while they jumped over 20 basis points on the 2-year treasury.

Markets think US rates will now peak at nearly five per cent and have raised their bets on a 100 basis point rise at the Fed’s next meeting in November.

Micheal Pearce, senior US economist at Capital Economics, said today’s upside surprise “nails on a 75 basis point rate hike at the November meeting,” adding more “the Fed may need to continue raising rates at that pace in December and perhaps beyond too”.

The Fed has hiked interest rates quicker than the Bank of England, sending them from near zero to around three per cent in around six months.

The Bank has stuck to 50 basis point rises, sending borrowing costs to 2.25 per cent.

However, turmoil in UK financial markets since the government’s mini budget has raised the prospect of the Bank launching a full percentage point rate hike at its next meeting on 3 November. 

That would be the biggest move since the Bank was made independent 25 years ago.

US core inflation, a more accurate measure of underlying price pressures, also came in above Wall Street’s forecasts, hitting 0.6 per cent in September.

Services inflation hit a 40-year high, underscoring inflation is shifting from being driven by international dynamics to domestic drivers.

The prospect of yet more jumbo sized Fed rate hikes will pile even more pressure on the already fragile UK gilt market.

UK rates have trended higher since the start of the year on expectations Powell and co would lift borrowing costs to tame inflation. 

But, prime minister Liz Truss and chancellor Kwasi Kwarteng’s £43bn of tax cuts and short-term borrowing splurge has lit a rocket fuel under yields. 

Today’s figures will put even more upward pressure on UK borrowing costs.

Yields and prices move inversely.

US earnings season kicks off this Friday with top US banks updating markets. Investors are looking for clues on how badly elevated inflation is hitting consumers, businesses and the wider economy.