Consumer prices for a broad range of products and services rose slightly more than anticipated in September, keeping inflation at the forefront for policymakers.
According to Thursday's report from the U.S. Bureau of Labor Statistics, the Consumer Price Index, a key measure of inflation, grew by 0.4% monthly and 3.7% annually. When setting aside the unpredictable food and energy prices, the core CPI saw an increase of 0.3% for the month and 4.1% annually.
The primary driver of inflation was the rise in shelter costs. The shelter index, which constitutes about a third of the CPI's weight, saw an increase of 0.6% monthly and a significant 7.2% annually.
“Shelter accounts for approximately one-third of overall CPI but lags real-time data by six-12 months, meaning weakness in the rental market is just starting to show up in the CPI. With time, shelter is poised to drag down overall inflation," First American Economist Ksenia Potapov said.
Potapov added this is a good sign that the Federal Reserve may stop hiking rates even though the minutes of its last meeting in September showed they were split on whether current inflation rates justified reducing the target federal funds rate to 2%.
"Inflation is trending downward, especially after stripping out the volatile food and energy components, while the largest monthly contributor, shelter, is set to decline in the months ahead," she said. “The inflation data, combined with the recent increase in bond yields, which effectively serves as a rate hike by increasing the cost of borrowing, signals the Fed will have little reason to hike rates in the next meeting.”
Marty Green, principal at mortgage law firm Polunsky Beitel Green, said the numbers indicate little reason for the Fed to increase rates at its next meeting.
“This report probably doesn’t change the likelihood of the Fed continuing to hold rates steady in November, but it does support the narrative that any reduction in the Fed discount rate next year may not be realized until later in 2024. For a mortgage and real estate market that is already struggling, this prospect may be scarier than Halloween," Green said.
Since the last Fed meeting, the 10-year Treasury yield has escalated to 4.66%.
According to the minutes released Wednesday, Fed officials pointed out that the expected reduction in inflation hasn’t been reflected in the core services prices, housing excluded.
Concluding that September meeting, the Federal Reserve Open Market Committee held the benchmark rate steady at 5.25%-5.5%, marking a 22-year high. Since its initiative to control inflation in March 2022, the key interest rate was increased 11 times by the committee.
Two more FOMC meetings are slated for this year, with the next two-day session concluding on Nov. 1.
Additionally, Federal Reserve Governor Michelle Bowman recently hinted that interest rates might have to elevate more persistently than previously estimated to achieve the 2% inflation target. Although Bowman refrained from commenting on the upcoming FOMC rate decisions, speaking at an event in Morocco, she mentioned the robust domestic spending and a tight labor market.
