Surging Rents Boost US Consumer Prices, Underlying Inflation Remains Low
Unexpected Rise in Rental Costs
US consumer prices saw an increase in September, driven by a surprising surge in rental costs. However, underlying inflation pressures remained moderate, supporting expectations that the Federal Reserve would not raise interest rates next month.
Smallest Increase in Two Years
The Labor Department’s report revealed that the annual increase in consumer prices, excluding food and energy components, was the smallest in two years. Economists anticipated that the rise in rents would reverse in the coming months, despite conflicting reports showing declining asking rents and an increase in the supply of multi-family housing. However, achieving the Fed’s 2% inflation target could be a challenge, given the tight labor market, potentially leading to an extended period of elevated interest rates.
Other Factors Influencing Monetary Policy
Higher US Treasury yields and conflicts in the Middle East are additional factors that may discourage the Federal Reserve from tightening monetary policy further. While the overall trend remains positive, the fight to reach inflation targets continues, with recent increases in long-term rates potentially prompting the Fed to extend its pause until December.
Key Findings from the Report
The consumer price index (CPI) increased by 0.4% in September, primarily due to a 0.6% jump in housing costs. Gasoline prices rose by 2.1%, while food prices climbed by 0.2%. Grocery food prices edged up by 0.1%, and consumers paid more for meat, fish, and eggs. However, prices of cereals and bakery products dropped for the first time since June 2021. In the 12 months through September, the CPI advanced by 3.7%, down from a peak of 9.1% in June 2022.
Impact on Core CPI
The core CPI, which excludes food and energy components, rose by 0.3% in September, matching the gain in August. Notably, owners’ equivalent rent increased by 0.6%, the largest rise since February. However, independent measures continue to show downward trends in rents, suggesting a lag in the CPI data. The core CPI gained 4.1% on a year-on-year basis in September, the smallest rise since September 2021. Over the last three months, the core CPI increased by 3.1%.
Financial Market and Labor Market Impact
Wall Street stocks were trading higher, and the dollar rose against a basket of currencies, while US Treasury prices fell. The tight labor market, marked by low unemployment claims, continues to drive core services inflation, excluding rents. While inflation is slowly decreasing, the strong labor market poses a threat of its resurgence, keeping the Federal Reserve vigilant.
Future Monetary Policy Outlook
Economists estimate that the core personal consumption expenditures (PCE) price index rose by 0.3% in September, with a forecasted 3.7% year-on-year increase. Financial markets anticipate that the Federal Reserve will leave rates unchanged at its upcoming policy meeting, with a low chance of a hike in December. The strike by the United Auto Workers (UAW) is creating supply chain bottlenecks but has yet to show a significant impact on the labor market. The strike remains a source of uncertainty for the economic outlook, as noted by Fed policymakers.
Conclusion
Surging rents have contributed to an increase in US consumer prices, while underlying inflation remains low. The Federal Reserve is expected to maintain its current monetary policy stance, considering factors such as labor market tightness and external influences like higher Treasury yields and conflicts in the Middle East. The fight to achieve inflation targets continues, with the pace of progress likely to determine the future course of interest rates.
