Inflation came in hotter than expected in September, sparking a renewed sell-off in bond markets. Consumer prices rose more than anticipated, both on a monthly and yearly basis, according to the latest data from the Bureau of Labor Statistics.
- M-O-M: Consumer prices increased by 0.2% on a seasonally adjusted basis, matching the gains seen in August and July.
- Y-O-Y: On a year-over-year basis, prices were up 2.4%, slightly lower than August’s 2.5%, marking the lowest annual inflation rate since February 2021. However, the decline fell short of economists’ expectations for a 2.3% year-over-year rise. Analysts also expected a smaller monthly increase of just 0.1%.
Food & Energy: One significant factor driving inflation in September was food prices, which jumped 0.4%—the biggest monthly increase since January—following a more modest 0.1% rise in August. Year-over-year, food prices are now up 2.3%, the highest level since January.
- Energy prices, however, continued their decline, dropping 1.9% from August, a more significant drop than the previous month’s 0.8% decline. Energy costs are now down 6.8% year-over-year, offering some relief from broader inflationary pressures.
The Core: What has bond markets most concerned is the persistence of core inflation, which excludes volatile food and energy prices. Core prices rose 0.3% from August, pushing the annual core inflation rate up to 3.3% in September—both figures higher than economists had predicted.
- This marked the first increase in the annual core inflation rate since August 2022, raising fears that underlying inflationary pressures may not be easing as quickly as hoped.
- One bright spot in the data was shelter costs, which rose by just 0.2% in September, down from a 0.5% increase in August. This is the smallest increase in shelter costs since June, bringing the year-over-year rise down to 4.9%, the lowest since February 2022.
Sell-Off: Bond traders responded swiftly to the inflation report, with the yield on the 10-year Treasury note surging to just ynder 4.10%. This continued a trend of rising yields, ironic given that the 10-year yield is now nearly 50 basis points higher than it was following the Federal Reserve’s recent rate cut of 50 basis points.
Bottom Line: As inflation pressures linger and core prices show stubborn growth, the bond market’s reaction underscores concerns about the path forward for monetary policy. The latest data suggests that inflation may take longer to cool than previously anticipated, keeping markets on edge as they watch for the Fed’s next move.