Fed rate hike call seen tight as inflation heats up

By Ann Saphir

Oct 14 (Reuters) - A Federal ‌Reserve interest-rate decision later ​this month ​may be a closer call than previously thought after Labor Department data showed consumer prices were up 3.7% last month from a year earlier, well above the Fed's 2% target ‌and moving in the wrong direction.

Higher gasoline prices from the Middle East war were a ⁠main driver. Excluding volatile food and energy prices, the core Consumer Price Index (CPI) was up 2.6%, more than the 2.5% economists polled ‌by Reuters had projected.

The Fed lifted ‌the policy rate in September to a target range of 3.75%-4.00% to bring down too-high inflation, and officials have said they are looking closely for signs of broadening price pressures that could keep inflation high ​even if gas prices fall, necessitating more policy tightening. Wednesday's data contained plenty of such signs.

"The surprise was not concentrated in any one item, like it was with wireless in the August report, but ⁠instead reflected a number of components showing strength, i.e., it was broad-based," wrote Omair Sharif, founder of Inflation Insights.

Software prices were up 28% from ​a year earlier, the largest increase ever, and toy prices also notched a record rise, the data showed -- emblematic of inflationary impulses from both AI-driven demand and higher ​tariffs under the Trump administration.

"This means that inflation is broadening out, ‌something that is not a good omen for the Fed and would raise the probability for an increase in rates at the end of the October FOMC meeting," ⁠wrote Raymond James Chief Economist Eugenio Aleman, referring to the Fed's rate-setting Federal Open Market Committee, which next meets October 27-28.

In recent weeks several of the Fed's most influential policymakers have signaled there's time to weigh more data before delivering what ⁠most believe will be at least one more rate hike by year's end, and traders had bet heavily against a second ​straight hike under Fed Chairman Kevin Warsh -- especially just a week before November elections that will decide if Trump's Republican party holds on to majorities in Congress.

After Wednesday's economic data, interest-rate futures are priced for around even odds of an October ‌rate hike, a place of unusual uncertainty around the outcome of a Fed decision just two weeks away.

Fed policymakers are also weighing the risk of tightening too fast ‌and unduly slowing the labor market. Unemployment has been low, but job gains have also cooled.

"September CPI keeps inflation concerns ⁠alive, with core inflation still sticky, but ‌weaker jobs data and fragile consumer ​sentiment mean the Fed still has room to hold in October," PPHC Chief Economist Martin Beck said.

(Reporting by Ann Saphir, Michael S. Derby and Lucia Mutikani; Editing by Mark Potter and ‌Andrea Ricci)

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