US CPI Rises to 3.7% as Fed Rate-Hike Bets Send the Nasdaq Down 1.9%

Key Takeaways

• US consumer prices rose 0.6% in September, lifting annual inflation from 3.4% to 3.7%, above the 3.6% market forecast.
• Core CPI increased 0.3% month over month and 2.6% annually, indicating that price pressures extended beyond the energy sector.
• The Nasdaq Composite fell 1.9% as higher rate expectations and concerns about AI financing costs triggered heavy losses across chipmakers and data-center stocks.

US inflation accelerated more than expected in September, reviving speculation that the Federal Reserve could raise interest rates again and triggering the worst session for US stocks since July.

The Consumer Price Index rose 0.6% from August, its largest monthly increase in five months. Annual inflation climbed to 3.7% from 3.4%, exceeding the 3.6% consensus forecast and moving further away from the Federal Reserve’s 2% objective.

Core CPI, which excludes volatile food and energy prices, increased 0.3% for the month and 2.6% from a year earlier. Both readings were slightly higher than expected. bls.gov

The hotter report sent Treasury yields sharply higher immediately after its release and increased expectations of another Fed rate hike. Technology and artificial-intelligence stocks led the resulting equity selloff, pushing the Nasdaq Composite down 1.9%.

September US CPI Report at a Glance

The headline monthly figure matched forecasts, but the annual rate and both core readings exceeded expectations. The combination suggested that the inflation increase could not be explained solely by a temporary jump in oil and gasoline prices.

The report was particularly significant because the Fed had already raised its target interest rate in September. Before the CPI release, several policymakers had indicated that the central bank could afford to wait before tightening policy again.

September’s data weakened that argument by showing inflation accelerating even as borrowing costs remained at restrictive levels.

Gasoline Prices Account for More Than Half of the Monthly Increase

Energy was the largest contributor to headline inflation.

The overall energy index rose 5.2% in September and 20.4% from a year earlier. Gasoline prices jumped 9.1% during the month and were 34.2% above their September 2025 level. According to the Bureau of Labor Statistics, gasoline accounted for more than half of the monthly increase in the headline CPI.

Fuel oil increased 15.3% in September and 74.2% year over year. Higher energy prices reflected disruptions and supply concerns associated with the conflict involving Iran and instability around major Middle Eastern shipping routes.

Food inflation was comparatively restrained. The food index was unchanged on a seasonally adjusted basis, while food-at-home prices declined 0.1%.

However, energy inflation can spread into other areas of the economy. More expensive fuel increases transportation, manufacturing and distribution costs, which companies may eventually pass on to consumers through higher goods and services prices.

Core Inflation Shows Broader Price Pressure

The increase in core CPI was more concerning for policymakers than the headline energy surge.

Services excluding energy services rose 0.4% in September and 3.1% from a year earlier. Shelter costs increased 0.4% during the month, accelerating from a 0.3% rise in August.

Transportation services rose 0.6%, supported by a 1.2% increase in airline fares and a 0.7% increase in vehicle maintenance and repair costs. Airline fares were 22.4% higher than a year earlier.

Hospital services increased 0.7%, while used vehicle prices rose 0.7% after gaining 0.4% in August. Apparel prices advanced 0.3%.

The three-month annualized rate of core inflation also accelerated to approximately 3.4%, up from about 2% in August. That measure suggests underlying price momentum has strengthened recently rather than merely responding to a single month of expensive fuel.

Fed Rate-Hike Odds Jump After the CPI Report

Interest-rate futures quickly adjusted following the release.

The implied probability of a 25-basis-point increase at the Fed’s October 27–28 meeting initially climbed to approximately 45%, up from 20% before the data, according to LSEG figures. The two-year Treasury yield rose about 12 basis points, while the 10-year yield initially gained approximately seven basis points.

The move later moderated. CME-based pricing showed an approximately 35% to 37% probability of an October hike by the end of the session, up from 22% before the CPI report. Markets also assigned a roughly 91% chance that the Fed would deliver at least one additional quarter-point increase by December.

The change does not make an October rate hike certain. A pause remained the more likely immediate outcome after markets stabilized. However, the report made a prolonged pause harder to justify and strengthened the case for another increase before the end of the year.

Fed officials must now determine whether the inflation shock is mainly a consequence of energy supply disruptions or evidence that price pressures are becoming embedded across the economy.

Treasury Yields Spike Above 5.32% Before Reversing

The 10-year Treasury yield surged from below 5.17% before the CPI release to more than 5.32%, approaching its highest level in approximately 24 years.

The move reflected expectations that inflation could keep interest rates elevated for longer and force the Fed to tighten policy further.

Yields subsequently reversed as the equity selloff intensified and investors moved into government bonds for safety. The 10-year yield ended near 5.19%, slightly below the previous session’s close.

This intraday reversal showed that the bond market was balancing two competing forces: inflation demanded higher yields, while the sharp decline in risk assets increased demand for Treasurys.

Shorter-dated yields remained particularly sensitive because they are more directly influenced by expectations for the federal funds rate.

Nasdaq Falls 1.9% as AI Stocks Lead the Selloff

The Nasdaq Composite fell 511.51 points, or 1.9%, to close at 26,692.87. The S&P 500 declined 86.51 points, or 1.1%, to 7,718.94, marking its fifth loss in six sessions since reaching a record high.

The Dow Jones Industrial Average proved more resilient, slipping 48.62 points, or 0.1%, to 51,621.48. The Russell 2000 also fell 1.9% as higher borrowing costs weighed on smaller companies.

AI-related shares experienced the heaviest selling:

• Nvidia fell 3.2%.
• Broadcom declined 3.1%.
• AMD dropped 5.7%.
• Oracle sank 8.8%.
• CoreWeave plunged 15.5%.
• GE Vernova lost 6.2%.

Higher interest rates affect technology companies by increasing the discount rate applied to their expected future profits. The effect can be particularly severe for highly valued companies whose earnings are expected to materialize several years in the future.

The latest rate shock also created a more direct problem for AI infrastructure companies. Building data centers requires enormous amounts of external capital, and higher Treasury yields increase the cost of issuing corporate bonds or refinancing existing debt.

CoreWeave’s decline was intensified by separate concerns about its debt load after yields on some of its bonds approached 15%.

Gold and Bitcoin Fall as the Dollar Strengthens

The inflation report also pressured assets that are sensitive to US interest rates.

Gold futures fell 1.64% to $4,084.80 per ounce, their lowest settlement since early August. Silver dropped 6.1% to $55.55, its weakest close in almost 11 months. www.wsj.com

Although gold is often viewed as an inflation hedge, it can decline when inflation causes interest-rate expectations and the US dollar to rise. Higher yields increase the opportunity cost of holding bullion, which does not produce interest income.

Bitcoin briefly fell below $82,000 as investors reduced exposure to speculative assets. The cryptocurrency’s reaction showed that it continued to trade more like a high-beta risk asset than a conventional inflation hedge during periods of rising yields.

What Comes Next for the Fed and Markets?

The next tests will be the September Producer Price Index and retail-sales report. Strong producer inflation would indicate that higher energy and transportation costs are entering corporate supply chains, increasing the risk of further consumer-price increases.

Stronger-than-expected retail sales would create an additional challenge for the Fed. Resilient spending could give businesses greater pricing power and suggest that current interest rates have not slowed demand sufficiently.

Markets will also monitor comments from Fed Chair Kevin Warsh and other policymakers for evidence that officials are considering an October increase.

Three scenarios now appear possible:

• October rate hike: Another strong inflation or spending report could push the Fed toward an immediate 25-basis-point increase.
• October pause, December hike: Policymakers may wait for another month of inflation and employment data before tightening again.
• Extended pause: This would require evidence that the September CPI increase was primarily an energy shock and that underlying inflation is cooling.

The September CPI report did not guarantee another rate increase, but it materially reduced the Fed’s flexibility. With headline inflation at 3.7%, core pressures broadening and financial markets already adjusting to higher borrowing costs, upcoming economic data will determine whether Wednesday’s selloff was a short-term repricing or the beginning of a deeper correction.