September core inflation tops the forecast, and an October Fed hike is back in play

A miss of 10 basis points on September core inflation nearly doubled the odds of a Federal Reserve rate increase on October 28. The 10-year Treasury yield gave back part of an early rise, and by mid-morning the funds that hold Treasuries were barely changed.

The Bureau of Labor Statistics said the consumer price index rose 0.6% from August, seasonally adjusted, after 0.4% the month before. Over the year it rose 3.7%, before seasonal adjustment, up from 3.4%. Economists polled by Dow Jones had expected the 0.6% monthly gain and a 3.6% annual rate.

Core inflation, which leaves out food and energy, rose 0.3% on the month, the same pace as August, and 2.6% over the year, up from 2.4%. Both core figures topped economists' estimates of 0.2% and 2.5%.

A tenth of a percentage point is a small surprise in a series this noisy. It was also the second straight month for core inflation at 0.3%, suggesting some short-term price stability.

"The September core CPI print came in a bit hot," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, in a Charles Schwab note. "That marks the second straight 0.3% monthly increase, bringing up the three-month annualized rate of change to 3.4%."

Gasoline drives increase

The Bureau of Labor Statistics (BLS) said gasoline rose 9.1% in the month to 30 September. The watchdog said this accounted for over half of the overall monthly increase in all items. Energy rose 5.2% on the month, after 2.1% in August, and 20.4% over the year, up from 16.3% in August. Food was unchanged on the month.

Shelter rose 0.4% on the month, from 0.3% in August, and 3.2% over the year, up from 3.0% in August. Owners' equivalent rent, the rent a homeowner would pay to rent their own home, rose 0.3%, and rent of a primary residence rose 0.2%. Lodging away from home, a smaller piece of shelter that includes hotels, rose 2.0%, ahead of both rent measures.

Services excluding energy services rose 0.4%, from 0.3% in August. Goods outside food and energy rose 0.3%, from 0.1% in August.

Odds on October rate hike double

Morningstar reported on October 12 that investors had priced a 55% chance of another increase right after the quarter-point rise on September 16. CME FedWatch, which reads the probability off interest-rate futures prices, put the chance of a quarter-point increase at the October 28 decision at 22.1% on Tuesday and 43.7% on Wednesday. The Federal Reserve's current target interest rate range is 3.75% to 4%.

The Fed's preferred price gauge is the personal consumption expenditures price index published by the Bureau of Economic Analysis (BEA), rather than the BLS CPI index. However, the BEA is scheduled to publish September's reading on October 29, the day after the Fed's decision, so the rate-setting committee will not have that gauge before it meets.

The two-year jumped, the 10-year eased

Charles Schwab reported the two-year Treasury yield at 4.89%, up more than 10 basis points, as of 9:11 a.m. Eastern.

The 10-year yield touched 5.33% and was back at 5.26% by 10:41 a.m. Eastern, five basis points above Tuesday's close of 5.21%. The 30-year yield was at 5.58%, against 5.56% on Tuesday.

Bond prices move the other way to yields. With the longer yields only a few basis points above Tuesday's close, the iShares 7-10 Year Treasury Bond ETF, BIEF, was down 0.3% at 10:41 a.m., and the iShares 20+ Year Treasury Bond ETF, BTLT, was down 0.1%. The iShares 1-3 Year Treasury Bond ETF, BSHY, was down 0.1%.

The iShares TIPS Bond ETF, BTIP, was down 0.1% as well. The inflation-protected Treasury bonds it holds adjust their principal with the consumer price index. The Treasury uses that index without seasonal adjustment, and September's reading is the reference for December 1. It does not change the principal on those bonds this morning.