San Francisco Frontiers - US consumer inflation hotter than expected as midterms loom

The uptick underscores voter worries over high costs of living, and comes as President Donald Trump is campaigning in US states to shore up support for his Republican party as it tries to retain control of Congress.

The consumer price index (CPI) rose 3.7 percent year-on-year in September, the Department of Labor said, more than the 3.6 percent analysts forecast according to MarketWatch.

This was a notable acceleration from 3.4 percent in August, in one of the last major economic reports before the November 3 vote.

Inflation picked up pace on a month-on-month basis too, accelerating from 0.4 percent in August to 0.6 percent last month.

The higher-than-expected reading has left analysts divided over the odds of a second straight interest rate hike at the US central bank's upcoming October 27-28 policy meeting.

Economist James Knightley at ING noted that Federal Reserve officials John Williams, Philip Jefferson and Christopher Waller have suggested "that we don't need to see back-to-back interest rate increases," instead leaning towards "a slow and steady" approach.

He expects the Fed will want to be "careful and cautious in terms of its policy tightening."

But traders now see a 51.5 percent chance that the Fed will raise rates by another 25 basis points in October, according to CME Group's FedWatch tool. The probability was around 22 percent a day prior.

Already, industries sensitive to interest rates, like housing, are under pressure from steeper borrowing costs.

Yields on US government bonds spiked after the inflation report. The 10-year Treasury yield, which influences rates on mortgage and auto loans, rose to 5.3 percent from 5.2 percent.

- Spillovers -

Gasoline costs accounted for more than half of the monthly CPI jump, surging 9.1 percent in September, Wednesday's report said.

Energy prices have soared since the United States and Israel attacked Iran in late February, prompting Tehran to block off the Strait of Hormuz, a vital route for oil and gas shipments.

Average prices at US gasoline pumps have surged more than 45 percent since the start of the Middle East war to $4.33 per gallon, according to AAA motor club data.

Diesel prices have soared even more, by 67.7 percent, boosting the cost of transporting goods and threatening further spillovers to consumers.

"Again, the Iran-US conflict has led to higher motor fuel costs that everyone is experiencing," ING's Knightley told AFP.

"The US is also seeing substantial increases in airline fares," he said, adding that this will likely contribute to additional price pressures.

Excluding volatile food and energy prices, core CPI was up 2.6 percent from a year ago.

Although high gasoline and diesel prices drove about half of the September spike in inflation, "it's starting to spill into other areas," warned Heather Long, chief economist at the Navy Federal Credit Union.

"Airfares, used cars and recreation all had big price jumps," she added. "Americans are seeing their pay totally wiped out by inflation. That's been the case for half a year now."

Long expects that another interest rate hike will be needed, likely in December.

With the underlying US economy remaining strong as massive spending linked to the artificial intelligence buildout boosts demand for chips and labor, economists also caution that higher costs could continue filtering through to households.

O.Anderson--SFF