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US inflation expected to have cooled slightly in September

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US inflation is expected to have dipped slightly in September, but not enough to completely eliminate the prospect of a further interest rate rise after recent data on the strength of the jobs market.

The consumer price index is forecast to rise 3.6 per cent year on year, according to economists surveyed by Bloomberg. That would mark a slight reduction from 3.7 per cent in August, although still higher than it was earlier in the summer.

On a monthly basis, inflation is expected to have decelerated from 0.6 per cent to 0.3 per cent, thanks in part to lower pressure from energy prices. However, “core” inflation, which strips out volatile energy and food prices, is expected to stay steady at 0.3 per cent month on month.

Core inflation is forecast to edge down from 4.3 per cent to 4.1 per cent on a year-on-year basis.

Official figures will be released by the Bureau of Labor Statistics at 8.30am Eastern Time on Thursday.

Investors and policymakers will be parsing the data given the lack of consensus over the likely path of monetary policy for the rest of the year.

Many investors had been willing to look through a recent rebound in the headline inflation rate because it was driven by energy prices. However, stronger than expected jobs data last week fuelled concerns that inflation may be become stuck above the Federal Reserve’s 2 per cent target.

The data drove yields on US government debt to their highest levels in 16 years and caused a brief jump in investor expectations that the Fed would raise its benchmark interest rate again before the end of the year.

Yields have eased back in recent days, and the likelihood of another rate rise this year, as implied by futures markets, has dropped to about 30 per cent. Several Fed officials suggested that higher Treasury yields could help to tighten financial conditions without the central bank needing to lift its own interest rate again.

The federal funds rate has risen from close to zero in March 2022 to a range of 5.25-5.5 per cent. At the time of the Fed’s most recent policy meeting in September, officials were leaning towards the likelihood of another rate increase before the end of the year, followed by a slow pace of cuts over the next two years.

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