Federal Reserve policymakers have a goal of 2 percent inflation, which they believe is a sign that the economy is strong but not moving too quickly. The gauge is not the central bank's most closely watched measure — that would be the personal consumption expenditures index — but still could figure into decisions on interest rates.
Following the release, markets priced in a higher possibility for a third rate hike before the end of the year. The chances are now at nearly 62 percent for a move in December, up from a coin-flip 50 percent the day before, according to the CME's FedWatch tracker.
The Fed currently has its benchmark rate pegged at 1.25 percent to 1.5 percent, which could be seen now as too low if the inflation pace is sustainable.
"The worry of the markets is not that inflation is becoming a big problem, ... it is that the Fed is now forced to play catch up at the same time they are shrinking their balance sheet," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "If the Fed wasn't so scared of their own shadow in 2015 and 2016 and hiked rates three times each year, we wouldn't be having the same conversation."
Markets also pushed up the probabilities for a March rate hike — already considered a near-certainty — and moved up the likelihood of a move in June. Traders also see about a 22 percent chance of a fourth quarter-point increase.
Most individual measures with the CPI showed gains, with a spike in fuel oil of 9.5 percent and a gain of 5.7 percent in gasoline leading. Gasoline is up 8.5 percent over the past year while fuel oil has surged 22.5 percent.
Food prices rose 0.2 percent, with food away from home up 0.4 percent, its biggest gain in a year and part of a 2.5 percent annualized gain. Fruits and vegetables increased 0.5 percent, with fruit up 1.9 percent and vegetables down 1.2 percent.
A 1.7 percent jump in clothing costs also stood out.