Soaring rent, food costs keep US inflation on front burner, labour market tight

US consumer prices increased more than expected in September as rents surged by the most since 1990 and the cost of food also rose, reinforcing expectations the Federal Reserve will deliver a fourth straight 75-basis-point interest rate hike next month.

The report from the Labor Department on Thursday also showed a measure of underlying inflation posting its biggest annual increase in 40 years as consumers also paid more for healthcare. The data followed on the heels of last week's strong employment report, which showed solid job gains in September and a drop in the unemployment rate to a pre-pandemic low of 3.5%.

"This is not what the Fed wants to see six months into one of the most aggressive tightening cycles in decades," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The consumer price index rose 0.4% last month after gaining 0.1% in August. Economists polled by Reuters had forecast the CPI would climb 0.2%.

Food prices increased 0.8%, with the cost of food at home advancing 0.7% amid rises in all six major grocery store food groups. Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, shot up 0.8%, the largest increase since June 1990.

The hefty jumps offset a 4.9% decline in gasoline prices. But gasoline prices have likely bottomed following last week's decision by the Organization of Petroleum Exporting Countries and allies to cut oil production.

The war in Ukraine also poses an upside risk to food prices. Private industry data suggests rents could be close to peaking.

Stubbornly high inflation, which is running way above the Fed's 2% target, is not only a challenge for the US central bank, but also a blow to President Joe Biden and Democrats' hopes of retaining control of Congress in elections next month.

Biden in a statement acknowledged the pain that higher prices were inflicting on American families, but also pointed out the considerable slowdown in the third quarter, with inflation rising at an average 2% annualised rate after an 11% pace in the prior quarter.

In the 12 months through September, the CPI increased 8.2% after rising 8.3% in August, decelerating for a third straight month. The annual CPI peaked at 9.1% in June, which was the biggest advance since November 1981.

Financial markets have almost fully priced in the prospect that the Fed will raise rates by another three-quarters of a percentage point at a Nov 1-2 policy meeting, according to CME Group's FedWatch tool.

The Fed has hiked its policy rate from the near-zero level in March to the current range of 3.00% to 3.25%. Policymakers at the Sept 20-21 meeting "expected inflation pressures to persist in the near term," according to minutes of the meeting released on Wednesday.

Stocks on Wall Street were trading higher. The dollar slipped versus a basket of currencies. US Treasury yields rose.

Broad-based pressure

Excluding the volatile food and energy components, the CPI climbed 0.6% in September, matching the rise in August. The so-called core CPI is being largely driven by the higher costs for rental accommodation.

Pressure is also coming from healthcare costs, which jumped 0.8%, the most since October 2019, as consumers paid more for doctor visits. Rents and healthcare are the most sticky components of the CPI, suggesting that inflation could remain elevated for a while even as goods prices moderate.Core services prices increased 0.8%, the largest gain since 1982.

Prices for new motor vehicles rose 0.7% as supply remains tight. Motor vehicle insurance also cost more as did household furnishings and operations, grooming, education and airline fares. But apparel prices fell 0.3% and prices for used cars and trucks declined for a third straight month. That resulted in core goods prices being unchanged, mirroring a similar reading in Wednesday's producer prices report for September.

This is largely a function of slowing demand and loosening global supply chains, which economists say could lead to a period of lower goods prices, even outright declines. But with spending swinging back to services, that would be insufficient to significantly cool inflation.

The core CPI jumped 6.6% in the 12 months through September, the most since August 1982, after rising 6.3% in August.

With the CPI and PPI data in hand, economists estimate that the closely watched core personal consumption expenditures (PCE) price index rose 0.4% in September, which would lift the year-on-year increase to 5.1% from 4.9% in August. The PCE inflation data will be released at the end of the month.

"Sticky-high services inflation is a reflection of the resilience of the labor market, since services are labour-intensive and produced domestically," said Michael Gapen, chief US economist at Bank of America Securities in New York.

"The Fed needs to slow the labor market down significantly to bring inflation back to target."

While a second report from the Labor Department showed the number of Americans filing new claims for unemployment benefits increased last week, that was likely because of Hurricane Ian, which cut a swath of destruction across Florida and the Carolinas at the end of September.

Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 228,000 for the week ended Oct 8. Unadjusted claims jumped 32,275 to 199,662. Applications surged by 10,368 in Florida. There were also big increases in filings in New York, California and Texas, while claims in Puerto Rico remained elevated in the aftermath of Hurricane Fiona.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, rose 3,000 to 1.368 million in the week ending Oct 1. There were 1.7 job openings for every unemployed person on the last day of August.

"The labour market remains extremely tight and companies continue to be unwilling to lay off workers," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.