US inflation rises to 3%, less than expected
Newsflash: US inflation has risen, but not as much as expected, new delayed economic data shows.
The annual US consumer prices index rose to 3% in September, up from 2.9% in August, but lower than the 3.1% which economists had forecast.
That means the cost of living is continuing to rise faster than the Federal Reserve’s 2% target, as the US central bank comes under pressure from the White House to cut interest rates faster.
In September alone, prices rose by 0.3%, a slight slowdown after rising 0.4% in August.
The data, which had been delayed by the ongoing US government shutdown, also shows that gasoline prices rose by 4.1% in September, while food was up 0.2%.
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Stock markets on both sides of the Atlantic have rallied, after a softer-than-expected US inflation report bolstered hopes of cuts to interest rates.
America’s S&P 500 index, and the Nasdaq, are both up around 1% after hitting new highs today, as investors celebrated the news that US inflation was lower than expected last month – at 3%, below forecasts of 3.1%.
In London, the FTSE 100 share index has just closed at a record high of 9645.62 points, a rise of 0.7% or 67 points today.
Joe Mazzola, head of trading & derivatives strategist at Charles Schwab, explains why Wall Street is expecting rate cuts:
“After weeks without any official economic data due to the government shutdown, Friday’s inflation data did little to change expectations for the Fed’s rate cut path, with price increases coming in cooler than expected and reinforcing expectations that the Fed will cut rates next week and again in December in response to a weakening labor market.”
In other news:
The latest poll of purchasing managers at British firms has found that growth is picking up after the lull in September, spurring hopes that the UK economy is improving.
NatWest bank has reported a 30% jump in pre-tax profits.
Sales at UK retailers rose unexpectedly last month to their highest level since July 2022, according to official figures, boosted by tech purchases amid the release of the new iPhone 17 as well as strong online demand for gold.
Flash US PMI signals strong start to fourth quarter
The US economy had made a strong start to the fourth quarter, but bosses are still nervous, new economic data shows.
US business activity growth accelerated in October to the second-fastest so far this year, according to a poll of purchasing managers at American companies.
S&P Global’s ‘flash’ PMI data shows there was a rise in new business this month, with both manufacturing companies and service firms reporting improvements in output and new work.
Less encouragingly, business confidence worsened, principally reflecting ongoing concerns over the impact of government policies such as tariffs, S&P Global says.
Chris Williamson, chief business economist at S&P Global Market Intelligence, explains:
“October’s flash PMI data point to sustained strong economic growth at the start of the fourth quarter, with business activity picking up momentum across both manufacturing and services despite some reports of businesses being adversely impacted by the government shutdown.
The survey data are consistent with the economy expanding at a 2.5% annualized rate in October after a similar rise was signalled for the third quarter.
However, business confidence in the outlook for the coming year has deteriorated further, and is at one of the lowest levels seen over the past three years as companies worry about the impact of policies, most notably tariffs.
US consumer sentiment falls to five-month low
Back in the US, consumer sentiment has hit a five-month low as people worry about high prices and the impact on their finances.
The University of Michigan’s consumer sentiment index has fallen to 53.6 this month, from 55.1 in September.
The survey found a decline in consumer expectations, and their current assessment of the economy.
Surveys of Consumers director Joanne Hsu reports that consumer sentiment was little changed this month.
A modest increase in sentiment among younger consumers was offset by decreases among middle-age and older consumers. Current personal finances inched up, while expected personal finances receded.
Overall, consumers perceive few material changes in economic circumstances from last month; inflation and high prices remain at the forefront of consumers’ minds.
There was little evidence this month that consumers connect the federal government shutdown to the economy. Only about 2% spontaneously referenced the shutdown during this month’s interviews, compared with the 10% of consumers who did so in January 2019 during that 35-day shutdown.
FTSE 100 hits new record high too
Britain’s stock market has followed Wall Street’s lead, and hit new record levels.
The FTSE 100 index of the largest companies listed in London has gained 39 points to hit 9,617 points, as a burst of buying pushed it over the 9,600 point-mark for the first time ever.
NatWest bank continues to lead the risers, up 4.7%, after reporting a jump in profits this morning.
S&P 500 and Nasdaq hit record highs after inflation report
Wall Street has hit fresh record highs at the start of trading, as traders welcome the smaller-than-expected rise in US inflation last month.
The news that US inflation was “only” 3% in September has pushed up all three major share indices, with investors showing more confidence that US interest rates will be cut.
The Dow Jones industrial average, which tracks 30 large US stocks, rose by 265 points at the start of trading to 46,999 points, up 0.57%.
The broader S&P 500 share index gained 0.8%, while the tech-focused Nasdaq is up around 1% – both hitting record highs.
Nathaniel Casey, investment strategist at UK wealth manager Evelyn Partners, explains:
“September’s inflation report, delayed due to the government shutdown, was slightly softer than expected with a 0.3% month-on-month print, pushing the annual rate to 3.0%. Much of September’s strength came from energy and core goods, with gasoline prices rising notably through the month. Core inflation also softened to 3.0%.
“We continue to see evidence of tariff impacts creeping into the inflation data, with core goods inflation accelerating from 0.3% year-on-year in May to 1.5% year-on-year in September. Within this. the basket for Apparel (an import sensitive segment) accelerated by 0.7% month-on-month in September, its highest rate since this time last year.
“The latest US inflation report surprised to the downside, and despite ongoing tariff uncertainty, it remains consistent with the Fed’s easing path. Core inflation eased while headline inflation rose only modestly, suggesting price pressures are contained. With labour market softness still the dominant concern, markets continue to price in 25-basis-point rate cuts at both the October and December Federal Open Market Committee meetings.”
Here’s our news story on the US inflation report:
Experts: US inflation paves way for Fed rate cut
Economists are welcoming the news that US inflation was lower than feared last month, and predicting it will pave the way for a cut in US interest rates next week.
James Knightley, chief international economist at ING, explains:
Tariff related inflation will remain a concern in the near term, but it is the jobs market that is becoming the more pressing issue for the Fed with a clear chance that the “low hire, low fire” economy becomes a “no hire, lets fire” story.
This jeopardises the “maximizing employment” goal of their dual mandate that could in turn prompt a weaker economy and risk them undershooting the 2% inflation target over the medium to longer term.
We continue to look for a 25bp rate cut next week with a further 25bp move in December and 50bp of cuts in early 2026.
Neil Birrell, chief investment officer at Premier Miton Investors, says today’s inflation report is ‘good news’:
It’s good to get some firm US economic data and the inflation number was a good one to get. It came in a little softer than expected for September, which is good news, particularly on the core rate. This probably seals a rate cut from the Fed next week and might even lead thoughts towards the view that tariffs are not going to have such a negative impact on inflation as feared, but it’s way too early to conclude that.
Nicholas Hyett, investment manager at Wealth Club, agrees that today’s slight inflationary undershoot probably makes more rate cuts just that little bit more likely:
“Though lower than analysts had feared, inflation remains above target.
We suspect a fair bit of the current inflationary surge is being driven by the effect of tariffs, which increases the cost of imported finished goods as well as raw materials for US manufacturers. This type of cost-push inflation is particularly hard to deal with because tweaking demand though changes to interest rates won’t affect prices, leaving the Federal Reserve trying to push water up hill in the short term.
An optimistic view would be that tariffs represent a one off step up in the price level, with inflation falling away after a year or so. That’s possible, but it relies on the economy avoiding an inflationary wage spiral – which, as the UK knows only too well, is easier said than done.”
The index for airline fares increased 2.7% in September, after rising 5.9% in August – a peak time for flights due to school summer holidays.
Digging into the US inflation report, we can see that housing pressures eased.
The shelter index (a measure of the cost of housing) rose by 0.2% in September, while the index for owners’ equivalent rent rose by just 0.1% in the month, the smallest 1-month increase in that index since January 2021.
Core inflation across the US has fallen, in a boost for households.
Today’s inflation report shows that the “all items less food and energy index” rose by 3% in the year to September, down from 3.1% in August.
That is an encouraging sign that inflationary pressures are not accelerating, as the US economy responds to the Trump trade war.