US inflation rises to 3.7% as fuel costs climb ahead of midterms

US inflation surged to 3.7% in September, driven by soaring fuel costs, clothing prices, and airfares, just weeks before midterm elections, according to data from the US Department of Labor. The annual rate surpassed economists' forecasts of 3.6%. Core inflation, which excludes volatile food and energy categories, rose to 2.6% year-over-year, up from 2.4% in August. Monthly core inflation stood at 0.3%, matching forecasts.

Richard Carter, head of fixed interest research at Quilter Cheviot, noted that CPI exceeded expectations, indicating that price increases are spreading across the economy. Elevated inflation has posed challenges for Republicans in Congress and complicated the Federal Reserve's efforts to control price rises. A recent AP-NORC Center poll found that only 17% of US adults approve of President Donald Trump's handling of the cost of living, with just 26% approving of his overall economic management.

Market reactions to the higher-than-expected inflation figures were evident as major US stock indices turned negative. Gold fell over 1.7% to $4,105.50 per ounce, and silver dropped more than 4% to $56.91 per ounce. Oil prices were mixed, with Brent trading just above $105.70 per barrel, near its opening level, while US benchmark WTI increased by 1.4% to $95.50 per barrel.

Bond yields responded to the news, with the two-year US Treasury yield rising 13 basis points to 4.93%, reflecting traders' increased expectations of further Federal Reserve rate hikes. The 10-year yield climbed about eight basis points to around 5.3%. Inflation moving away from the Federal Reserve's 2% target could push up borrowing costs, according to Robin Brooks, a former Goldman Sachs economist and senior fellow at the Brookings Institution.

Fed Chair Kevin Warsh emphasized that inflation remains too high, and he expressed concern that inflation trends have not improved significantly. Fed officials have suggested they may wait before raising rates again, although their projections still point to at least one more increase this year. While higher borrowing costs could ease inflation, they cannot resolve supply disruptions caused by the ongoing Iran war. The Fed's challenge remains to prevent higher energy costs from further fueling broader price rises.