Surging rents lift US consumer prices; underlying inflation grinding lower

Consumer prices in the United States rose by 0.4% in September, driven by a surge in rental costs, according to a report from the Labor Department. Shelter costs accounted for more than half of the increase, with a 0.6% jump in the cost of housing. The rise in rents was unexpected, as independent surveys had indicated declining asking rents and a rising supply of multi-family housing. Economists believe that this jump in rents is likely to reverse in the coming months.

Despite the increase in consumer prices, underlying inflation pressures remained moderate, supporting expectations that the Federal Reserve would not raise interest rates in the near future. The annual increase in consumer prices excluding food and energy was the smallest in two years. Reaching the Fed’s 2% inflation target could be a challenge due to a tight labor market and slower rental growth. This suggests that the central bank may keep rates elevated for longer.

The consumer price index (CPI) increased by 0.4% in September, following a 0.6% jump in August. Gasoline prices rose by 2.1% after a significant acceleration in August. Food prices climbed by 0.2%, with grocery food prices edging up by 0.1%. Meat, fish, and eggs became more expensive, while cereal and bakery products saw a drop in prices. Fruit, vegetable, and nonalcoholic beverage prices remained unchanged.

In the 12 months through September, the CPI advanced by 3.7%, slightly lower than the 3.6% increase expected by economists. Excluding food and energy components, the CPI rose by 0.3% in September, matching August’s gain. Shelter costs, including home rentals, increased by 0.6%, which was the largest rise since February. However, independent measures showed that rents are on a downward trend, and it remains to be seen if the increase in larger cities offsets softer increases in smaller cities.

The core CPI, which excludes volatile food and energy prices, rose by 0.3% in September, the same as in August. On a year-on-year basis, the core CPI gained 4.1%, the smallest rise since September 2021. The increase in core CPI was driven by rising costs of lodging away from home, motor vehicle insurance, recreation, personal care, new vehicles, and household furnishings and operations. However, used car and truck prices fell by 2.5%, and apparel costs dropped by 0.8%. Core goods prices fell by 0.4%, while services inflation excluding energy accelerated by 0.6%.

The continued strength in the labor market, with a tight labor market and strong demand, suggests that higher interest rates could be sustained for some time. This is supported by the fact that weekly jobless claims remained unchanged at 209,000, indicating a stable labor market. However, the ongoing strike by the United Auto Workers (UAW) may pose a new source of uncertainty for the economic outlook. The strike has led to bottlenecks in the supply chain and furloughs and layoffs at major automakers.

Overall, while there was a notable increase in consumer prices in September, underlying inflation pressures remained moderate. This is likely to keep the Federal Reserve from raising interest rates in the near future. With the labor market still tight, reaching the Fed’s inflation target of 2% could be a gradual process. Higher U.S. Treasury yields and geopolitical tensions in the Middle East are also factors that could discourage the Fed from tightening monetary policy. The next Fed policy meeting is expected to maintain rates at their current level, with a potential rate hike later in the year dependent on economic conditions.