U.S. inflation rose on gas and shelter costs in September

U.S. consumer prices increased in September amid higher costs for rent and gasoline, but underlying inflation is slowing, supporting financial market expectations that the Federal Reserve would not raise interest rates next month.

The consumer price index increased 0.4 per cent last month, the Labor Department said on Thursday. The CPI jumped 0.6 per cent in August, which was the largest increase in 14 months.

In the 12 months through September, the CPI advanced 3.7 per cent after rising by the same margin in August. Year-on-year consumer prices have come down from a peak of 9.1 per cent in June 2022.

Economists polled by Reuters had forecast the CPI gaining 0.3 per cent and climbing 3.6 per cent year-on-year.

Excluding the volatile food and energy components, the CPI rose 0.3 per cent. Used motor vehicle prices fell, but the cost of shelter increased amid costly rents. The so-called core CPI increased 0.3 per cent in August.

The core CPI gained 4.1 per cent year-on-year in September after advancing 4.3 per cent in August. The government reported on Wednesday that producer prices increased 0.5 per cent in September, lifted by higher gasoline and food prices, though underlying inflation pressures at the factory gate continued to abate.

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Inflation remains above the Fed’s two per cent target, 18 months after the U.S. central bank started hiking rates.

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.

Violence in the Middle East is also seen discouraging the Fed from tightening monetary policy further, though it has led to Treasury yields pulling back from 16-year highs. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25 per cent-5.50 per cent range.

But still-strong demand in the economy, marked by labor market tightness, suggest 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 survey. The labour market’s resilience is driving core services inflation excluding rents.

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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 bottle necks in the supply chain, forcing Ford Motor, General Motors and Chrysler-parent Stellantis to furlough and lay off hundreds of workers.

The UAW industrial action was flagged by 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.”

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)