"The increase in the annual rate of core inflation is not a good story and the Federal Reserve has stated it is willing to inflict economic pain to get inflation moving back to the 2% target. 75bp is indeed the solid call for the November 2nd FOMC meeting," ING Group.

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The Euro did better than many others even as it fell to an October low against the Dollar after official data showed U.S. inflation accelerating further in September, inciting a sharp rally in government bond yields and bringing Federal Reserve (Fed) interest rate policy back into focus for the market.

Europe's single currency fell back below the 0.97 level against the greenback on Thursday and traded briefly below 0.9650 after the Bureau of Labor Statistics said that U.S. inflation rose by 0.6% last month once energy and food items are removed from the basket of goods for which price changes were measured.

The 0.6% increase in the core inflation rate was larger than the 0.5% uplift envisaged by the economist consensus and enough to lift the annual pace of core inflation from 6.3% to 6.6%, surprising on the upside of a consensus that was looking for a 6.5% figure.

"The rise in core prices reflected ongoing increases in the shelter component, which lags developments in the housing market by around a year," says Katherine Judge, an economist at CIBC Capital Markets.

"But price pressures were broad based, compounding pressure on the Fed to act, as medical care services, car insurance, new vehicles, and household furnishings/operations also rose strongly," she added.

Above: EUR/USD shown at 2-hour intervals alongside AUD/USD, NZD/USD and an upside down or inverted USD/JPY.

Meanwhile, after including changes in food and energy prices the official or mani inflation rate remained stubbornly elevated at an annualised 8.2% in September following a 0.4% monthly increase that was larger than the 0.2% uplift anticipated by economists on average.

"With inflation printing above 7% on an annualised basis and no signs that wage growth is cooling as millions of available workers remain on the sidelines of the US labour market, the Fed is very much locked into hiking aggressively into year-end," says Simon Harvey, head of FX analysis at Monex Europe.

Thursday's data will leave Federal Reserve interest rate setters with little choice but to continue along the monetary policy path outlined by September's Federal Open Market Committee forecasts, which suggested the main U.S. interest rate could rise a further 1.25% this year to sit at 4.5% by year-end.

The Dollar had fallen broadly against most G20 currencies ahead of the release but quickly reversed its way to intraday gains over almost all counterparts including the Euro, although the single currency fared better than most.

"Today's figures confirm the Fed top officials' fear that inflation is more stubborn than previously expected. Even if energy prices settle down over the next few months, inflation is likely to fall only slightly and remain far higher than the Fed's 2% target," says Dr Christoph Balz, a U.S. economist at Commerzbank.

Source: Netdania Markets.

"The minutes of the latest FOMC meeting reflect the Fed's determination to bring inflation back under control. Monetary policy would have to become "appropriately" restrictive to achieve this, and the Fed would have to maintain this course of action even in the event of a weakening labor market," Dr Balz wrote to clients following a review of the data.

The Commerzbank team says Thursday's data means that further significant increases in interest rates are "virtually certain" and forecasts that the Fed will raise the Fed Funds rate range by three quarters of a percentage point for a fourth consecutive occasion in November.

Commerzbank also forecasts the U.S. interest rate to rise as high as 5% next year, which is above the 4.75% peak projected by Fed officials in September.

"The increase in the annual rate of core inflation is not a good story and the Federal Reserve has stated it is willing to inflict economic pain to get inflation moving back to the 2% target. 75bp is indeed the solid call for the November 2nd FOMC meeting. But we are still looking for the Fed to slow the pace to a 50bp in December," says Jame Knightley, chief international economist at ING.

"Our rationale is that the economy is slowing and there is more evidence pointing to weakening corporate pricing power. The National Federation of Independent Business survey shows the proportion of companies looking to raise their prices is moderating quickly to reflect the shifting growth outlook and rising inventory levels that they don’t want left on their books," Knightley added.