The dollar reaches an 18-month high and October rate-hike odds climb after the inflation surprise

Consumer prices rose from 3.4% to 3.7% year over year in September, above the 3.6% economists had expected, according to the Bureau of Labor Statistics report released on Wednesday². Interactive Brokers said the hotter-than-anticipated reading sparked Wall Street turbulence, hitting equities and Treasuries and driving the dollar to an 18-month high¹. CNBC reported that the US dollar index was up about 0.40% after the release⁵.

Reuters said the print put a Federal Reserve rate increase this month back on the table⁴. The Wall Street Journal’s Nick Timiraos wrote that the reading bolsters the case for another increase by the central bank, which is led by Chairman Kevin Warsh⁷. MarketWatch said rate-hike odds are rising going into this month’s meeting⁸.

Why it matters to investors

Interactive Brokers said investors fear the Fed will extend its hiking cycle because price pressures are drifting away from the central bank’s 2% target¹. Reuters described the call as a tight one, reporting an assessment that September’s data keeps inflation concerns alive, with core inflation still sticky, while weaker jobs data and fragile consumer sentiment point the other way³.

The household picture is deteriorating alongside the price data. Barron’s noted a third consecutive month of declining consumer sentiment, driven by mounting frustration over higher costs of living⁹. Reuters said the inflation report added to surveys this month that showed a further deterioration in consumer sentiment and a plunge in President Trump’s approval rating⁴.

The political pressure on the Fed is now explicit. MarketWatch reported that Kevin Hassett, a top White House economic adviser, urged the Fed to hold off on any rate hike¹⁰. That leaves the central bank weighing a hot inflation print against an administration that does not want tighter policy ahead of the midterm elections^9,10.

What to watch

The Wall Street Journal said Wednesday’s unexpectedly hot report raised the stakes for Warsh’s coming appearance in Bangkok, the next scheduled chance to hear from the chairman before the meeting⁶. MarketWatch is already setting out what the Fed might do when it next convenes, with hike odds moving⁸.

Currency and rates markets are the live read. CNBC reported the dollar index higher after the data, while the euro edged up as European Central Bank President Christine Lagarde dashed expectations of intervention to prop up France⁵. Barron’s expects the hotter data to spur a midterm fight over the cost of living⁹.