INSTANT VIEW: Warm Sept CPI inflation chills outlook for dovish Fed

(Reuters) - U.S. consumer prices rose slightly more than expected in September, but the annual increase in inflation was the smallest in more than 3-1/2 years, potentially keeping the Federal Reserve on track to cut interest rates again next month.

The consumer price index increased 0.2% last month after gaining 0.2% in August, the Labor Department said on Thursday. In the 12 months through September, the CPI climbed 2.4%, the smallest since February 2021 following August's 2.5% advance.

Economists polled by Reuters had forecast the CPI edging up 0.1% and rising 2.3% year-on-year.

MARKET REACTION:

STOCKS: U.S. stock index futures extended a slight loss to -0.35% pointing to a soft open on Wall Street BONDS: The 10-year U.S. Treasury yield edged off to 4.0667% and the two-year yield fell to 3.9908%FOREX: The dollar index was off 0.09% and the euro was 0.02% firmer

COMMENTS:

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER AT DAKOTA WEALTH IN FAIRFIELD, CONNECTICUT

"It's a little bit hotter than expected, the top line and the core level, and is a bit of a disappointment for those that were hoping for rate cuts coming at successive meetings. People are thinking the Fed is now going to be concerned about the level of inflation. It's kind of a kick in the shins."

"CPI isn't the preferred method of tracking inflation by the Fed but its darn close. People are thinking the Fed is going to drag its feet on rate cuts."

"Stock futures would be down more had it not been for the initial unemployment claims which is higher than expected."

"That could be for a number of reasons like hurricanes or strikes, but that number has been creeping up which means the job market may not be as strong as some are thinking."

"Stock futures are reacting immediately to the data. The CME Fedwatch tool is probably taking into account that you had a giant hurricane take out part of the south and then you just had another one."

"The hurricane may make it a little more likely the Fed is going to continue to cut interest rates to help the economy keep moving forward."

WHITNEY WATSON, GLOBAL CO-HEAD AND CO-CIO OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT (by email)

"The September CPI report came in stronger than expected, with core CPI in particular surprising to the upside. Labor market data, however, remains in the driving seat for the Fed and we see next month’s payrolls release as the more important data point in determining the pace and extent of Fed easing."