U.S. inflation heats up in September, supporting expectations of Fed rate hike

U.S. inflation accelerated in September as consumers paid more for gasoline and other goods, supporting economists’ expectations of an interest rate increase from the Federal Reserve in December.

The Personal Consumption Expenditures Price Index climbed 0.5 per cent last month after an unrevised 0.3-per-cent rise in August, the Commerce Department’s Bureau of Economic Analysis said on Thursday. The increase was in line with economists’ expectations. In the 12 months through September, PCE inflation advanced 3.6 per cent after an unrevised 3.4 per cent rise in August.

The data were included in the government’s advance gross domestic product report for the third quarter, which showed the economy growing at a 3.4 per cent annualized rate during that period.

Excluding the volatile food and energy components, the PCE Price Index rose 0.3 per cent over the month after an upwardly revised 0.3 per cent gain in August.The so-called core PCE inflation was previously estimated to have climbed 0.2 per cent in August.

Core PCE inflation increased 3.1 per cent year-on-year in September after an unrevised 3.0 per cent rise in August.

The U.S. central bank tracks the PCE price measures for its 2-per-cent inflation target. The Fed on Wednesday left its benchmark interest rate in the current 3.75-4-per-cent range while acknowledging that inflation “remains elevated.”

Fed Chairman Kevin Warsh told reporters that “energy and related prices have moved higher again in recent weeks, and our job is to ensure that relative price changes in some sectors do not broaden out across the economy, and that inflation expectations remain as they are anchored.”

Financial markets were pricing in a roughly 84.6 per cent chance of a rate hike in December, CME’s FedWatch Tool showed.

Higher prices inflated consumer spending numbers in September. Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.5 per cent last month after an unrevised 0.9 per cent increase in August, the BEA said.

When adjusted for inflation, consumer spending was unchanged last month, heading into the fourth quarter on a weaker growth trajectory. Spending increased at a 3.8 per cent rate in the July-September quarter.