US inflation trails estimates as used-car prices tumble

A gauge of underlying US inflation was below estimates in September as used-car costs fell and housing rents cooled, signalling 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% in September from a year earlier, the same pace as in August and less than the 2.3% median estimate of economists surveyed by Bloomberg News, a Labour Department report showed on Thursday.

The broader CPI slowed to a 2.3% annual gain, the least since February, compared with forecasts for 2.4%.

The inflation figures partly reflect a 3% 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% but in recent months it’s been easing some,” said Michael Moran, an economist at Daiwa Capital Markets 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 US inflation rate for the next decade - the 10-year breakeven rate - remains near a four-month high of 2.17% reached last week.

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

Real wages

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

Fed chairperson 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%, the first decline since April.

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

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

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

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 Labour Department’s CPI. September numbers are due on October. 29.

“It’s a benign number,” Constance Hunter, chief economist at KPMG, said on 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 Labour 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.