U.S. Consumer Prices Still Rising Briskly

U.S. consumer prices advanced at a brisk pace for a second month, reinforcing the Federal Reserve’s intent to keep interest rates high in order to bring down inflation.

The so-called core consumer price index (CPI), which excludes food and energy costs, increased 0.3 percent in September, Bureau of Labor Statistics (BLS) data showed Thursday. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4 percent, boosted by energy costs.

Recent inflation data underscores how a strong labor market is underpinning consumer demand, which risks keeping prices above the Fed’s target. At their meeting last month, a majority of officials saw a need for one more interest rate hike this year, and they may maintain that bias—despite a recent surge in bond yields—if inflation doesn’t cool further.

That said, comments from several Fed speakers this week suggest the central bank may hold interest rates steady when it meets November 1, with some indicating that further hikes may not be necessary.

“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. “The question around whether there will be one more interest rate hike is yet to be answered.”

Treasury yields rose, while the S&P 500 fluctuated and the dollar appreciated. Traders priced in nearly even odds of one more quarter-point increase this year.

The advance reflected increases in housing costs, car insurance, and recreational services like tickets for sporting events. Used cars fell by the most since early this year, and motor vehicle parts declined by the most on record.

Shelter prices, which make up about a third of the overall CPI index, accounted for over half of the increase in the monthly advance and were boosted by the biggest jump in hotel stays in two years. A key measure of housing costs accelerated at the fastest pace since February. Looking ahead, a sustained moderation in this category is essential for the downward trajectory of core inflation.

Excluding housing and energy, services prices climbed 0.6 percent from August, the most in a year, according to Bloomberg calculations. While Fed Chair Jerome Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure, known as the personal consumption expenditures (PCE) price index, is compiled with data from the CPI report as well as the producer price index (PPI), which also rose by more than forecast last month, due in part to gas prices.

Unlike services, goods prices continued to decelerate. So-called core goods prices, which exclude food and energy commodities, fell 0.4 percent, matching the biggest drop since early in the pandemic, according to the CPI data. On an annual basis, they were little changed.

What Bloomberg Economists Say…

“The September CPI report won’t convince most Fed officials that interest rates are sufficiently restrictive. … Our baseline is for the Fed to hold rates steady for the rest of the year, but we see non-negligible risks of another rate hike, something the market is probably underpricing.”

— Anna Wong & Stuart Paul

Households are still struggling with high costs for many essentials. Prices for medical-care services rose by the most this year, including a big jump in hospital stays. Electricity costs also advanced by the most in 2023, and prices at the pump continued to rise.

That said, grocery inflation slowed to a three-month low, and apparel prices fell by the most since May 2020. Piped gas also declined.

The persistence of inflation has dogged Joe Biden’s presidency, with approval ratings hovering around 40 percent for most of this year.

After showing some progress, Americans’ wages are no longer keeping up with inflation. A separate report Thursday showed inflation-adjusted earnings fell for a second month. Another release showed initial applications for unemployment benefits remained near historically low levels last week at 209,000.

Looking ahead, it’ll likely be a long and bumpy path to get inflation sustainably lower. Part of the issue stems from the health insurance component of the CPI, which will shift from being a reliable drag on consumer prices to a consistent upward pressure. Last month, the category posted a 37.3 percent annual decline, the most on record.

Furthermore, the unfolding war between Israel and Hamas risks escalating and restricting the flow of oil from the region—which could push up energy costs once again.

While many forecasters now see the U.S. skirting a recession, the economy’s outlook remains uncertain. On one hand, unemployment is low, hiring is robust, and households seem to have more excess savings than previously thought. On the other, small businesses are growing more pessimistic about the outlook, borrowing costs are high, and the resumption of student-loan payments risks denting consumer spending.

Copyright 2023 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.