U.S. Core-Inflation Gauge Picks Up for First Time Since January

(Bloomberg) -- U.S. inflation excluding food and fuel accelerated on an annual basis for the first time since January, a pickup that will be welcomed by Federal Reserve officials debating the pace of interest-rate increases, a Labor Department report showed Wednesday.

Key Takeaways

While a 1 percent drop in energy prices weighed on overall inflation, the rise in the core gauge was relatively broad- based. Housing costs were a significant factor, with the shelter index climbing 0.3 percent. Prices for medical care, education, air fares and auto insurance also rose, while new vehicles, apparel and recreation showed declines.

Prices for wireless-phone services and hotel stays both increased. In recent months, several Fed officials have cited changes in these costs as transitory factors affecting inflation. 

The report may help reinforce investors’ expectations that the Fed will raise interest rates in December for the third time this year, after central bank officials began to wonder if there was a breakdown in their long-held assumption that low unemployment would help push up inflation. The data will play a role in the timing and number of rate increases in 2018; officials next month will update their projections for the benchmark interest rate.

Policy makers’ preferred gauge of inflation, a separate figure based on consumer purchases and issued by the Commerce Department, has matched or exceeded the Fed’s 2 percent goal in only two months of the past five years. Some central bank officials focus on the measure excluding food and energy, which is also below their target. October data are due Nov. 30.

Businesses may get more pricing power over time amid rising household demand, the tightening job market and improving global economies. For consumers, though, inflation remains relatively contained, boosting their purchasing power at a time wages have been growing modestly.

A separate report on Wednesday showed steady demand from U.S. consumers, as retail sales rose in October compared with the median estimate of analysts for no change.

Other Details

• Food costs unchanged from previous month
• The CPI for new vehicles fell 0.2 percent; air fares rose 0.6 percent
• Shelter costs advanced 0.3 percent, including a 1.6 percent increase in lodging away from home; 0.3 percent increase in owners’ equivalent rent, one of the categories designed to track rental prices
• Expenses for medical care rose 0.3 percent; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies
• Hourly earnings adjusted for inflation rose 0.4 percent from October 2016, after a 0.6 percent gain, according to a separate report from the Labor Department
• 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 Chris Middleton

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.

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

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