Soaring rent, food costs keep US consumer inflation on front burner

• Consumer prices increase 0.4% in September
• CPI advances 8.2% on year-on-year basis
• Core CPI rises 0.6%; jumps 6.6% year-on-year

US consumer prices increased more than expected in September as rents surged by the most since 1990 and the cost of food also rose, reinforcing expectations the Federal Reserve will deliver a fourth 75-basis-point interest rate hike next month.

The report from the Labor Department on Thursday also showed a measure of underlying inflation posting its biggest annual increase in 40 years as consumers also paid more for health care. The data followed on the heels of last week's strong employment report, which showed solid job gains in September and a drop in the unemployment rate to a pre-pandemic low of 3.5%.

"This is not what the Fed wants to see six months into one of the most aggressive tightening cycles in decades," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The consumer price index rose 0.4% last month after gaining 0.1% in August. Economists polled by Reuters had forecast the CPI would climb 0.2%.

Food prices increased 0.8%, with the cost of food at home advancing 0.7% amid rises in all six major grocery store food groups. Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, shot up 0.8%, the largest increase since June 1990.

The hefty jumps offset a 4.9% decline in gasoline prices. But gasoline prices have likely bottomed following last week's decision by the Organization of Petroleum Exporting Countries and allies to cut oil production. The war in Ukraine also poses an upside risk to food prices.

Stubbornly high inflation, which is running way above the Fed's 2% target, is not only a challenge for the US central bank, but also a blow to President Joe Biden and Democrats' hopes of retaining control of Congress in elections next month.

In the 12 months through September, the CPI increased 8.2% after rising 8.3% in August. The annual CPI peaked at 9.1% in June, which was the biggest advance since November 1981.

Financial markets have almost fully priced in the prospect that the Fed will raise rates by another three-quarters of a percentage point at a Nov. 1-2 policy meeting, according to CME's FedWatch tool.

The US central bank has hiked its policy rate from the near-zero level in March to the current range of 3.00% to 3.25%. Policymakers at the 20-21 September  meeting "expected inflation pressures to persist in the near term," according to minutes of the meeting released on Wednesday.

US stocks opened lower. The dollar rose against a basket of currencies. US Treasury prices fell.

BROAD-BASED PRESSURE

Excluding the volatile food and energy components, the CPI climbed 0.6% in September, matching the rise in August. The so-called core CPI is being largely driven by the higher costs for rental accommodation.

Pressure is also coming from healthcare costs, which increased 0.8% as consumers paid more for doctor visits.

Prices for new motor vehicle rose 0.7% as supply remains tight. Motor vehicle insurance also cost more as did household furnishings and operations, grooming, education and airline fares. But apparel prices fell 0.3% and prices for used cars and trucks declined for a third straight month.

The core CPI jumped 6.6% in the 12 months through September, the most since August 1982, after rising 6.3% in August.

Government data on Wednesday showed the weakest reading in producer core goods prices in nearly 2-1/2 years in September. The pass-through from producer to consumer inflation, however, could take a while.

Some of the inflation pressures are coming from a tight labor market. While a separate report from the Labor Department on Thursday showed the number of Americans filing new claims for unemployment benefits increased last week, that was likely because of Hurricane Ian, which cut a swath of destruction across Florida and the Carolinas at the end of September.

Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 228,000 for the week ended Oct. 8. Economists had forecast 225,000 applications for the latest week.

Unadjusted claims jumped 32,275 to 199,662. Claims surged by 10,368 in Florida. There were also big increases in filings in New York, while claims in Puerto Rico remained elevated in the aftermath of Hurricane Fiona.

Discounting the distortions from the storms, the labor market remains tight. There were 1.7 job openings for every unemployed person on the last day of August, and layoffs also remain low.

The minutes from the Fed's September meeting also showed policymakers "anticipated that the supply and demand imbalances in the labor market would gradually diminish," and "that the transition toward a softer labor market would be accompanied by an increase in the unemployment rate."