By Lucia Mutikani
WASHINGTON, Oct 12 (Reuters) – U.S. consumer prices rose in September as rental costs surged, but a steady moderation in underlying inflation pressures supported financial market expectations that the Federal Reserve would not raise interest rates next month.
The report from the Labor Department on Thursday showed the annual increase in consumer prices excluding the volatile food and energy components last month was the smallest in two years. With the labor market remaining tight, however, reaching the Fed’s 2% inflation target could take some time, making it likely that the U.S. central bank could keep rates elevated for longer.
Higher U.S. Treasury yields and conflict in the Middle East are also seen discouraging the Fed from tightening monetary policy further.
“The bigger picture is that the trend is still quite encouraging, but the fight continues,” said Olu Sonola, head of U.S. regional economics at Fitch Ratings in New York. “They (Fed officials) may now want to extend the pause to December, given the recent increase in long-term rates.”
The consumer price index increased 0.4% last month. A 0.6% jump in the cost of shelter accounted for more than half of the rise in the CPI. There were increases in the costs of rent and hotel and motel accommodation.
The CPI surged 0.6% in August, which was the largest increase in 14 months. Shelter costs rose 0.3% in August.
Gasoline prices rose 2.1% after accelerating 10.6% in August. Food prices climbed 0.2%, with grocery inflation edging up 0.1%. Consumers paid more for meat, fish and eggs, but prices of cereals and bakery products fell 0.4%, the first drop since June 2021. Prices for fruits and vegetables were unchanged as were those of nonalcoholic beverages.
In the 12 months through September, the CPI advanced 3.7% after rising by the same margin in August. Year-on-year consumer prices have come down from a peak of 9.1% in June 2022. Economists polled by Reuters had forecast the CPI would gain 0.3% and climb 3.6% on a year-on-year basis.
Excluding the volatile food and energy components, the CPI rose 0.3%, matching August’s gain. Owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, shot up 0.6%. That was the largest rise since February and followed a 0.4% gain in August. Rents remain elevated despite more apartment buildings coming on the market.
The so-called core CPI was also lifted by a 3.7% rise in the cost of lodging away from home, which ended three straight monthly declines. There were also increases in the costs of motor vehicle insurance, recreation, personal care, new vehicles as well as household furnishings and operations.
But prices for used cars and trucks fell 2.5%, while apparel costs dropped 0.8%. The core CPI gained 4.1% on a year-on-year basis in September, the smallest rise since September 2021, after advancing 4.3% in August.
The government reported on Wednesday that producer prices increased 0.5% in September, lifted by higher gasoline and food prices, though underlying inflation pressures at the factory gate continued to abate.
Inflation remains above the Fed’s 2% target 18 months after the U.S. central bank started hiking rates.
U.S. stocks were trading mixed. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
TIGHT LABOR MARKET
Financial markets overwhelmingly anticipate the Fed will leave rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group’s FedWatch Tool.
That conviction found support from comments by top ranking Fed officials on Monday that soaring yields on long-term U.S. government bonds could steer the central bank away from further rate hikes. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
Still-strong demand in the economy, marked by labor market resilience, suggests borrowing costs could remain elevated for some time. The economy created 336,000 jobs in September, the most in eight months and almost double the amount economists had expected in a Reuters poll. The labor market’s stamina is driving core services inflation excluding rents.
In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits were unchanged at a seasonally adjusted 209,000 for the week ended Oct. 7. Economists had forecast 210,000 claims for the latest week.
There is no sign yet that the United Auto Workers (UAW)strike, now in its fourth week, is having a major impact on the labor market. The strike is creating bottlenecks in the supply chain, forcing Ford Motor (F.N), General Motors (GM.N) and Chrysler-parent Stellantis (STLAM.MI) to furlough and lay off hundreds of workers.
The UAW industrial action was flagged by Fed policymakers as a new source of uncertainty surrounding the economic outlook.
Minutes of the Fed’s Sept 19-20 meeting published on Wednesday showed “many participants observed that an intensification of the strike posed both an upside risk to inflation and a downside risk to activity.”
“Indeed, while inflation is slowly edging lower, the strong labor market means that the threat of inflation resurgence cannot be ignored, keeping the Fed on its toes,” said Seema Shah, chief global strategist at Principal Asset Management.
Reporting by Lucia Mutikani; Editing by Paul Simao