US consumer price inflation rose more than expected in September

By Alicia Wallace, CNN

Minneapolis (CNN) — Inflation remained elevated in September as gas and rents kept prices high and heaped more pressure on consumers, according to new data released Thursday by the Bureau of Labor Statistics.

However, the latest Consumer Price Index also showed that certain inflation gauges are the lowest they’ve been in more than two years.

The Consumer Price Index rose 3.7% for the 12 months ended in September, holding steady with August’s annual gain and landing a touch above economists’ expectations for a 3.6% rise.

On a monthly basis, prices grew 0.4%, landing above Refinitiv estimates for a 0.3% gain.

Although the annual headline inflation rate held steady, Thursday’s CPI report also showed encouraging progress on areas critical to American households as well as the Federal Reserve.

Food price inflation is at its lowest rate since March 2021, matching overall inflation at 3.7%. It’s the first time since early 2022 that food prices did not outpace overall inflation, CPI data shows. And grocery price increases are even lower, at 2.4% annually.

Also, underlying inflation trends are moving in the desired direction of the Fed, which has been on an inflation-busting campaign of rate hikes since March 2022.

When stripping out gas and food, the core CPI cooled for the sixth month in a row and was up 4.1% annually off a 0.3% monthly gain.

It’s the lowest annual growth rate for core CPI in two years. The monthly increase in core held steady from what was seen in August.

Nagging, and lagging, rents

The shelter index, which is largely a measurement of rental leases as well as the implicit rental value of owner-occupied properties, accounted for 70% of the monthly core increase and more than half of the overall monthly increase.

Economists have said that shelter costs, as measured by the CPI, should eventually start to wane. That’s because the CPI rental calculations significantly lag what’s happening in real time and are not showing the recent declines.

“Market rents are flat across the country since the end of last year,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “So it’s only a matter of time — months — before we start to see much slower increases in shelter costs. And once that happens, we’ll be back within spitting distance of the Fed’s target.”

Taking shelter out of the equation, core CPI rose just 0.1% for the month and is up 2% year over year, according to the report. That’s the lowest annual increase that index has recorded since March 2021.

Headwinds build, but the inflation picture improves

The Fed’s goal inflation rate is 2%, as measured by the core Personal Consumption Expenditures price index. That inflation gauge remains nearly double that target rate — it rose 3.9% for the 12 months ended in August — however, it’s been steadily cooling.

“The Fed will want to see at least six months of lower inflation before declaring victory,” said Julia Pollak, chief economist at online job marketplace ZipRecruiter. “In the meantime, higher borrowing costs are weighing on households, particularly those with credit card debt or subprime car loans; and on businesses, especially those with high levels of debt in variable-rate bonds. If rates stay higher for longer, as the Fed has signaled, that will likely drag down consumer spending and business spending — including on hiring — in the coming months.”

Adding to the consumer headwinds are a cooler labor market, the return of student loan payments and slowing wage growth.

While that’s not great news for Americans, it could help bring down inflation.

“When you look ahead, and you look at the broader picture, we’re still in an environment in which labor market conditions are going to be softening and continuing to loosen, we are also expecting to see more disinflation from reduced housing rents and just lower economic activity,” Lydia Boussour, EY’s senior economist, told CNN in an interview. “So we do think that this disinflation trend remains in place and will continue as we head into 2024.”

There may be some bumpiness on that path lower, Zandi said.

“But we’re on a line, and I think we’re going to get back to the target and something all Americans feel comfortable with by this time next year,” he said.

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