US September inflation came in above expectations on almost all key metrics. Headline CPI accelerated to 3.7% year over year versus a forecast of 3.6% and 3.4% a month earlier. Prices rose 0.6% for the month.
Core inflation also came in above forecast
Core CPI, which excludes food and energy, rose to 2.6% year over year. The market expected 2.5%. On a monthly basis, the core reading added 0.33% versus a forecast of about 0.2%. This part of the report is especially important for the Fed, as it better reflects the persistence of price pressure.
What drove prices up the most
Energy was the main factor. Gasoline rose by roughly 9.1% for the month. The energy component as a whole rose by 5.2%. Gasoline accounted for more than half of the monthly increase in headline CPI. Prices for used cars, airfares and housing rent also rose.
Real incomes came under pressure
Against the backdrop of rising prices, real weekly wages fell by about 0.5%. This means that nominal income growth did not fully offset the acceleration in inflation. For the Fed, this combination is especially difficult: prices remain high while purchasing power is starting to weaken.
How Bitcoin reacted
The crypto market's reaction was almost instantaneous. BTC fell from $83,860 to $82,731 in five minutes. After the first wave of selling, the price settled around $83,125. The market interpreted the report as an argument in favor of a tighter Fed policy.
What happened with gold and bonds
Gold quickly declined from $4,153 to $4,117 per ounce. The yield on 2-year US Treasuries rose by about 13.5 basis points, to 4.89%. This is a typical reaction to stronger inflation: the market is pricing in a higher rate path.
The dollar received support
USD/JPY rose from 158.46 to 158.82. The dollar strengthened against major currencies and remained near its highest levels in the last 18 months. S&P 500 futures simultaneously lost about 26 points. Thus, the first reaction followed the classic pattern: higher yields and dollar, lower risk assets and gold.
What changed regarding the Fed rate
The probability of a rate hike at the October meeting already rose from about 21% to 47%. The expected amount of tightening by year-end increased from about 27 to 36 basis points. In September, the Fed already raised the rate by 0.25 percentage points, to a range of 3.75-4.00%. Now the market is taking another step up significantly more seriously.
Why this report is especially important
This is the last major consumer inflation report before the Fed meeting on October 27-28. Consequently, these figures will be one of the main supports for the regulator's decision. If subsequent data also show persistent inflation, the probability of another hike could rise even further.
What's next
Now attention shifts to new economic data and comments from Fed officials. For markets, the key question is whether they will confirm the need for another rate hike. If hawkish expectations persist, the dollar and yields could receive additional support, while gold, stock indices and cryptocurrencies remain under pressure.
Were you in the order book at 15:30?
The first minutes after CPI once again showed how quickly the market can cover a large distance. For a prop trader, the program rules are especially important here. In some places, trading directly at the moment of the CPI release is allowed, while in others there is a ban on opening trades a few minutes before and after the release. Additionally, the rules for calculating daily drawdown and execution conditions during sharp candles differ.