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US consumer prices rise on food; Hurricane Helene muddies labour market picture

Consumer price index increases 0.2% in September

US consumer prices rose slightly more than expected in September amid higher food costs, but the annual increase in inflation was the smallest in more than 3-1/2 years, keeping the Federal Reserve on track to cut interest rates again next month.

Other data from the Labour Department on Thursday showed first-time applications for unemployment benefits surged last week to the highest level in more than a year, driven by Hurricane Helene and a nearly month-old strike at Boeing.

The strike and hurricanes could cloud the labour market picture through the end of the year.

Despite the firmer-than-expected monthly inflation reading, a sharp moderation in rent increases led economists to expect a more muted rise in the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the US central bank for its 2 per cent target.

“Consumers might fixate on the firmness of inflation in categories like food, while the Fed might welcome the softer shelter reading finally starting to come through,” said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. “Either way, inflation has been normalizing. As such, the evolution of the Fed’s approach feels prudent.”

The consumer price index increased 0.2 per cent last month after gaining 0.2 per cent in August, the Labour Department’s Bureau of Labour Statistics said. Food prices jumped 0.4 per cent after rising 0.1 per cent in August. Grocery store food prices increased 0.4 per cent, lifted by higher costs for meat, poultry, fish and eggs. Fruits and vegetable prices rebounded 0.9 per cent after dropping 0.2 per cent in August.

But consumers got some relief from gasoline prices, which plunged 4.1 per cent. Rents increased 0.3 per cent after climbing 0.4 per cent in the prior month. In the 12 months through September, the CPI rose 2.4 per cent. That was the smallest year-on-year increase since February 2021 and followed a 2.5 per cent advance in August.

Economists polled by Reuters had forecast the CPI edging up 0.1 per cent and rising 2.3 per cent year-on-year. The annual increase in inflation has slowed from a peak of 9.1 per cent in June 2022.

Inflation is a major issue for voters in next month’s presidential election. Vice President Kamala Harris, the Democratic Party’s nominee, is locked in a tight race with the Republican Party’s candidate Donald Trump.

The Fed has mostly shifted focus to the labour market, delivering an unusually large 50 basis points rate cut in September. Minutes of that meeting published on Wednesday showed a “substantial majority” of policymakers supported starting an era of easier monetary policy with an outsized cut, but there appeared even broader agreement that the initial move would not commit the Fed to any particular pace of rate reductions in the future.

The first rate reduction since 2020 lowered the central bank’s policy rate to the 4.75 per cent-5.00 per cent range. The Fed hiked rates by 525 basis points in 2022 and 2023. Financial markets saw a roughly 89 per cent probability of a 25 basis points rate cut at the Fed’s Nov. 6-7 policy meeting, according to CME Group’s FedWatch Tool. The odds of rates being unchanged were at about 11 per cent.

Stocks on Wall Street fell. The dollar edged up against a basket of currencies. US Treasuries yields were mostly lower.

Excluding the volatile food and energy components, the CPI increased 0.3 per cent after rising 0.3 per cent in August, pointing to some stickiness in inflation. The so-called core inflation was driven by a rebound in the prices of used cars and trucks.

Healthcare costs rose 0.4 per cent, lifted up by a 0.9 per cent surge in the cost of doctor services. Prescription medication prices fell 0.5 per cent. Motor vehicle insurance increased 1.2 per cent, while apparel prices advanced 1.1 per cent.

Airline fares cost 3.2 per cent more. But owners’ equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting their property, gained 0.3 per cent after rising 0.5 per cent in August.

Rents have been among the major drivers of inflation. The cost of hotel and motel rooms dropped 1.9 per cent.

In the 12 months through September, the core CPI advanced 3.3 per cent after gaining 3.2 per cent gain in August.

Economists’ estimates for the rise in the core PCE price index in September ranged from 0.16 per cent to 0.23 per cent. Core inflation ticked up 0.1 per cent in August. Annual inflation was forecast rising 2.6 per cent after advancing 2.7 per cent in August. Friday’s producer price data for September could change these estimates.

A separate report from the Labour Department showed initial claims for state unemployment benefits increased 33,000 to a seasonally adjusted 258,000,for the week ended Oct. 5, the highest level since early August 2023 amid weather and strike distortions. The increase was the largest since July 2021. Economists had forecast 230,000 claims for the latest week.

Unadjusted claims soared 53,570 to 234,780 last week. They were boosted by a 9,490 jump in claims in Michigan amid layoffs at Stellantis plants. The state also has a strong presence of Boeing suppliers. Filings in Ohio increased 4,328, blamed on Stellantis job cuts.

Claims in Washington State rose 1,744 and California reported a 4,484 increase, linked to the Boeing strike.

Applications shot up 8,534 in North Carolina and rose 3,843 in Florida. Helene, which tore through Florida and devastated large swathes of the US Southeast in late September, is likely to continue boosting claims in the weeks ahead.

The labour market’s short-term outlook is also likely to be muddied by Hurricane Milton, which barreled through Florida on Thursday, whipping up deadly tornadoes, destroying homes and knocking out power.

The roughly 33,000 machinists at Boeing who walked off the job last month could negatively impact October’s employment report. Pay talks between the workers’ union and planemaker collapsed on Tuesday.

Economists expect Fed officials will discount any sharp drop in payrolls or rise in the unemployment rate in October.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 42,000 to a seasonally adjusted 1.861 million during the week ending Sept. 28, the claims report showed.

“The storms and the strike will distort the October jobs report, pushing payroll job growth down substantially,” said Nancy Vanden Houten, lead US economist at Oxford Economics.

“We expect the Fed will view the impact of these events on the labour market as temporary and won’t let them determine their next policy move.”