Inflation rises 2.4% in September, above expectations

Inflation continued to cool in September to the lowest level in three years, though the report came in slightly hotter than expected.

The Labor Department on Thursday said the consumer price index (CPI) — a broad measure of how much everyday goods like gasoline, groceries and rent cost – rose 0.2% in September from the prior month and was up 2.4% from a year ago. 

Economists predicted that inflation would slow to 2.3% on an annual basis with it rising 0.1% from last month, according to estimates by economists surveyed by LSEG.

So-called core prices, which exclude more volatile measurements of gasoline and food to better assess price growth trends, were up 0.3% on a monthly basis and 3.3% compared to a year ago — slightly higher than economists' expectations of 0.2% and 3.2%, respectively.

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Overall, the report showed signs that inflationary pressures in the U.S. economy are continuing to ease, though prices remain above the Federal Reserve's 2% target.

High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. Price hikes are particularly devastating for lower-income Americans, because they tend to spend more of their already-stretched paycheck on necessities and therefore have less flexibility to save money.

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Much of the increase in core inflation in September came from shelter prices rising 0.2% compared with August. Shelter prices are up 4.9% over the last year, and accounted for over 65% of the total 12-month increase in the core inflation index that excludes food and energy.

Other areas with notable price increases from a year ago include motor vehicle insurance (+16.3%), medical care (+3.3%), personal care (+2.5%) and apparel (+1.8%).

Prices for airline fares rose 3.2% in September compared with August. That was slightly slower than the 3.9% increase a month ago, and leaves the year-over-year rise at 1.6%.

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Consumers also experienced an increase in food prices, which increased 0.4% on a monthly basis and were up 2.3% from a year ago. The food at home index also rose 0.4% compared with a month ago, though its annual increase was notably smaller at 1.3%. Prices for food away from home were up 0.3% on a monthly basis and 3.9% from a year ago.

Beef and veal prices are up 4.2% from a year ago, while other types of meat have seen smaller 12-month price hikes, including pork (+1.5%) and poultry (+0.5%). Ham prices declined 2.5% from a year ago, while fish and seafood prices were down 1.3%. Egg prices are up 39.6% on an annual basis after climbing 8.4% in September relative to August.

Energy prices declined 1.9% in September compared with August, and are down 6.8% compared with a year ago.

The latest CPI data comes as the Federal Reserve has embarked on a campaign of interest rate cuts to lower borrowing costs as inflation cools toward its 2% target. The central bank cut rates by 50 basis points in September, lowering the benchmark federal funds rate from a range of 5.25% to 5.5% to 4.75% and 5%.

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"The larger than-expected gain in the September consumer price index doesn't signal a reacceleration in inflation, nor will it deter the Federal Reserve from cutting interest rates by 25bps at its November meeting," said Ryan Sweet, chief U.S. economist at Oxford Economics. "The Fed needs to continue to normalize interest rates to keep the economy on a path toward a soft landing."

Markets have increasingly taken the view the Fed will cut by 25 basis points rather than a larger 50 basis point cut. Interest rate traders see an 87% probability of a 25 basis point cut next month, with a 13% probability of the Fed holding rates steady, according to the CME FedWatch tool. A week ago, markets saw a 32% chance of a 50 basis point cut and no chance of the Fed foregoing a rate cut — showing the impact of last week's jobs report and the latest inflation data.

"One slightly hotter-than-expected CPI reading doesn’t mean a new wave of inflation has been unleashed, but the fact that it accompanied a jump in weekly jobless claims may add to short-term market uncertainty," said Chris Larkin, managing director of trading and investing  at E*Trade by from Morgan Stanley. "We’re in a ‘good news is good, bad news is bad’ environment, and these weren’t good numbers — but that doesn’t mean they upended the larger outlook for solid economic growth and moderate inflation."

The Fed will hold its next policy meeting on Nov. 6-7 on the heels of Election Day, which is Nov. 5.