U.S. Inflation Trails Estimates; Prices Remain Near Fed Goal

(Bloomberg) -- A gauge of underlying U.S. inflation was below estimates in September as used-car costs fell and housing rents cooled, signaling that price gains may remain close to where Federal Reserve policy makers want them amid an outlook for continued gradual interest-rate hikes.

Excluding volatile food and energy costs, the core consumer price index rose 2.2 percent in September from a year earlier, the same pace as in August and less than the 2.3 percent median estimate of economists surveyed by Bloomberg News, a Labor Department report showed Thursday. The broader CPI slowed to a 2.3 percent annual gain, the least since February, compared with forecasts for 2.4 percent.

The inflation figures partly reflect a 3 percent monthly decline in prices for used cars and trucks, the biggest drop in 15 years. While the dollar and 10-year Treasury yields initially fell after the report, Fed officials will have two more months of price figures in hand before their December meeting at which they’re projected to raise interest rates for a fourth time this year amid solid economic growth and consumer spending, boosted by tax cuts.

“The Fed would like to see inflation stay around 2 percent but in recent months it’s been easing some,” said Michael Moran, chief economist at Daiwa Capital Markets America in New York. However, “I wouldn’t change my Fed call” for a December hike based on this report, he said, as a strong economy and close-to-full employment mean inflation shouldn’t cool too much.

Benchmark Treasury yields have climbed to multi-year highs this month amid investor expectations that the Fed will continue raising rates to the point of eventually restricting growth, and Wednesday’s rout in stocks has put added focus on economic data. A market-based gauge of the annual U.S. inflation rate for the next decade -- the 10-year breakeven rate -- remains near a four-month high of 2.17 percent reached last week.

The core CPI rose 0.1 percent in September from the prior month, compared with the median estimate of economists for a 0.2 percent gain. The broader CPI was also up 0.1 percent on a monthly basis, below forecasts for a 0.2 percent increase.

Real Wages

The slowdown in inflation helped push price-adjusted wages higher in September. Inflation-adjusted pay rose 0.5 percent from a year earlier, following a 0.2 percent increase in August.

Americans’ outlooks for inflation one and three years in the future were steady in September at 3 percent, according to the New York Fed’s Survey of Consumer Expectations released Tuesday. Fed Chairman Jerome Powell said in a speech last week that inflation is roughly at the central bank’s 2 percent objective and “the outlook of forecasters inside and outside the Fed is for more of the same.”

Besides the drop in used-car prices, costs for new vehicles fell 0.1 percent, the first decline since April.

Categories showing increases included shelter, which accounts for about one-third of the CPI and rose 0.2 percent from August, the smallest gain in three months. Owners-equivalent rent, one of the categories designed to track rental prices, increased 0.2 percent.

Apparel prices increased 0.9 percent, the biggest gain since February, after a 1.6 percent monthly drop in August that was the most in almost seven decades. Airfares rose 1 percent.

Seasonally adjusted gasoline prices decreased 0.2 percent in September from the prior month, following a 3 percent increase.

What Our Economists Say The downside miss in the September CPI and the failure of core CPI to accelerate on a year-on-year basis confirms our view that the Fed’s 2 percent inflation target will not be sustained in the near term. The Fed will stick to a very gradual path of removing policy accommodation amid increasing financial and global risks. -- Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics Read more for the full reaction note.

The Fed’s preferred gauge of inflation -- a separate consumption-based figure from the Commerce Department -- has been just above the central bank’s 2 percent goal in recent months, and the figure tends to run slightly below the Labor Department’s CPI. September numbers are due on Oct. 29.

“It’s a benign number,” Constance Hunter, chief economist at KPMG LLP, said Thursday on Bloomberg Television. “The Fed has said they’re going to do one more this year, more or less, and then three next year. I think that’s completely on track.”

A separate Labor Department report on Thursday showed filings for unemployment benefits ticked up last week while remaining near the lowest level since 1969. Initial jobless claims rose 7,000 to 214,000, with North Carolina and South Carolina still reflecting the impact of Hurricane Florence, according to the report, which may also indicate volatility around the Columbus Day holiday.

Other Details

• The increase in the core CPI brought the three-month annualized gain to 1.8 percent, after 2 percent
• Energy prices fell 0.5 percent from previous month; food costs were unchanged
• Prices for medical care advanced 0.2 percent following two months of declines; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies
• Thursday’s consumer-price report also indicated retired workers receiving Social Security benefits may receive a 2.8 percent cost-of-living adjustment in 2019; it’s up to the Social Security Administration to issue the final determination
• The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents

--With assistance from Jordan Yadoo, Shobhana Chandra and Sarah Foster.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns

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