US inflation jumped to 3.7 per cent in September as the war in Iran drove a rebound in fuel prices, piling pressure on Americans ahead of the midterm elections and prompting traders to raise bets on Federal Reserve rate rises.
Wednesday’s annual consumer price index figure was up from 3.4 per cent in August and ahead of the 3.6 per cent forecast in a Bloomberg poll of economists.
Core inflation, which strips out volatile food and energy prices, also came in ahead of Wall Street expectations, rising to 2.6 from the previous month’s figure of 2.4 per cent.
Wednesday’s data from the Bureau of Labor Statistics marks the first time US annual inflation has risen since May. It underlines how the energy shock triggered by the war in the Middle East continues to reverberate across the world’s biggest economy, weeks ahead of November’s midterm election.
RM Block
US President Donald Trump has tried to contain the economic fallout from the conflict and douse fuel prices, as Democrats tap into voter frustration at the cost of living and seek to wrest control of Congress from his Republican Party.
But Wednesday’s data suggests that less affluent Americans in particular are being increasingly squeezed. Hourly earnings rose by just 3 per cent in September versus a year earlier, marking the sixth consecutive month of declining real wage growth.
“Inflation simply isn’t coming down quickly enough,” said Eric Winograd, chief economist at AllianceBernstein. “The bottom part of the K-shaped economy is losing ground, as anybody who has seen campaign ads on TV the last few weeks has heard.”
The inflation data increased bets that the Fed could raise rates again as soon as this month after it lifted borrowing costs for the first time in three years in September. Expectations of an October increase had faded in recent weeks after central bank officials indicated they were not in a rush to act again.
Following the data release, traders in the futures market were pricing in a roughly 45 per cent chance of an October rise, up from 22 per cent before.
Budget 2027: Does this giveaway budget have potential banana skins that might lie ahead for the Government?
Jeff Schulze, head investment strategist at the Franklin Templeton Institute, said that the latest data “bolsters the case for additional rate hikes, but recent dovish Fed-speak . . . suggests that the bar is high for an immediate hike”.
“I don’t think there is going to be urgency to react to this one report and raise interest rates six days before midterms,” added Joe Lavorgna, chief economist at SMBC Nikko Securities. “The Fed doesn’t want to put itself into a political fight unnecessarily. But they will almost certainly go again in December.”
Treasury yields jumped following the figures, with the two-year rising as much as 0.16 percentage points to 4.95 per cent, approaching the 28-month high it hit in September.
The months-long sell-off in the Treasury market had abated in recent days, as bond investors began to snap up government debt. But the recovery in bonds was almost fully erased by Wednesday morning’s move.
The US dollar strengthened 0.6 per cent against the euro to its highest level since May 2025.
The sell-off in bonds was poised to cascade into the equities market, with futures tracking the tech-focused Nasdaq 100 falling almost 0.8 per cent and those for the blue-chip S&P 500 down 0.2 per cent.
The September inflation rise was largely driven by higher fuel prices, with the BLS’s index tracking petrol prices up 34.2 per cent year on year and 9.1 per cent higher than August’s figure.
Petrol and diesel costs eased during the summer from the initial highs after the war broke out. But they have bounced back in recent months as tensions flared in the Middle East, sending the price of diesel to record highs and prompting a flurry of policy interventions by Trump.
Analysts noted that the rise in core inflation suggested price pressures were becoming more entrenched, with rises in everything from cars and airfares to education and toys.
“Today’s CPI report stands out as the first of the year in which price pressure appeared to be showing up in most corners of the consumption basket at once,” said Jason Pride, chief of investment strategy and research at Glenmede. - Copyright The Financial Times Limited 2026
