Accelerating inflation in the USA strengthens the possibility of a new interest rate increase by the end of the year

Consumer Price Index (CPI) data announced by the US Department of Labor yesterday revealed that inflation is accelerating in the country.

The country's CPI increased in line with expectations with a monthly rate of 0.6 percent in September and above expectations with an annual rate of 3.7 percent. Thus, monthly inflation reached the highest level in the last 5 months and annual inflation reached the highest level in the last 4 months.

While energy prices were the determining factor in the rise in inflation, the index related to gasoline prices increased by 9.1 percent on a monthly basis in September. The rise in gasoline prices accounted for more than half of the monthly increase recorded in CPI.

Core CPI, which does not include variable energy and food prices, increased by 0.3 percent on a monthly basis and 2.6 percent on an annual basis in September, more than expected.

The outlook for core inflation brought about evaluations that price pressures are not limited to the rise in energy prices.

The Beige Book report published by the Fed yesterday also stated that price pressures continue in the country and that pressures arising from input costs have intensified in some regions.

Tight monetary policy expectations strengthened the dollar

Inflation data indicating that price increases are accelerating also affected expectations regarding the Fed's monetary policy outlook.

While the possibility of the Fed keeping the policy rate constant at the meeting to be held on October 27-28 has weakened somewhat in the pricing in the money markets, the country's long-term bond interest rates have climbed.

Immediately after the data was published, the US 10-year treasury bond rate increased by 11 basis points to 5.33 percent, and the 30-year bond rate increased by 7 basis points to 5.63 percent.

With expectations of tighter monetary policy, the dollar index increased by 0.7 percent and recorded the highest level of the year at 102.94.

The country's 10-year bond interest rate reached 5.37 percent last week and the 30-year bond rate reached the peaks of the last 24 years at 5.73 percent, and this week it retreated slightly.

Analysts stated that the fact that inflation was above expectations strengthened the expectations that the Fed could keep monetary policy tight for longer and make another interest rate increase this year in order to ensure price stability. Some analysts pointed out that it remains unclear whether the Fed will wait until December for a new interest rate increase.

Employment data weakened interest rate hike expectations in October

The employment report published at the beginning of this month pointed out a cooling in the labor market.

Accordingly, while non-agricultural employment in the USA increased by 29 thousand people in September, below expectations, the unemployment rate increased to 4.2 percent. A downward revision of 60 thousand people was made in the July and August data regarding non-agricultural employment.

The fact that employment data was below expectations strengthened the predictions that the Fed would leave interest rates unchanged in October.

Following the CPI data, expectations that the policy rate would be kept constant in October continued to maintain their weight, although they declined.

According to CME Group data, as of October 14, markets priced the possibility of the Fed keeping the policy rate constant at 3.75-4 percent at its October meeting as 67 percent, and the possibility of an interest rate increase as 33 percent.

Prices in the markets predict that the Fed may increase interest rates by 25 basis points at its last meeting of the year in December.

"The sharp rise in gasoline prices pushed headline inflation up"

ING America Regional Research Head Padhraic Garvey made evaluations regarding inflation data to the AA correspondent.

Stating that core inflation was above market expectations in September, Garvey noted that the monthly increase in housing costs, which is the largest item in terms of weight, accelerated to 0.4 percent, confirming his predictions that there is an upward risk in the core inflation data.

Garvey mentioned that the sharp rise in gasoline prices on a monthly basis is the main factor that drives headline inflation up, and stated that food prices have remained unchanged, and price increases in items such as health services, education and communication services have remained more limited.

Pointing to the recent statements made by Fed officials that they are not in a hurry to increase interest rates after the tightening move in September, Garvey said, "The general picture is not strong enough to force the Fed to increase interest rates again in October. Although the possibility of an interest rate increase increased after the announcement of the CPI data, this rate is still below 50 percent. In any case, a new interest rate increase seems likely, which will enable us to see an interest rate increase at least in December." he said.

"The disinflation process may take a long time"

American Enterprise Institute Senior Expert Steven Kamin noted that the increase in headline inflation in September was due to energy prices, but the fact that core inflation increased by 0.3 percent for the second month in a row shows that rising energy costs are reflected in other parts of the economy.

Pointing out that there is no sign that the tension with Iran will end soon, Kamin said, "All this shows that although inflation will probably decline when energy prices decrease, this process may take a long time." made his assessment.

Kamin stated that this situation creates a troublesome situation for Fed President Kevin Warsh, who has pledged to reduce inflation to the target again, and therefore for the Fed, and said, "The possibility of an interest rate increase in October, which Fed officials have removed from the agenda in recent weeks, seems to be on the table again." he said.