U.S. consumer prices jumped by the most in seven months in October, which together with abating fears of a recession, support the Federal Reserve’s signal for no further interest-rate cuts in the near term.
The report from the Labour Department on Wednesday showed health-care costs surging by the most in more than three years and recreation posting its biggest gain since early 1996. But a moderation in rents suggested inflation would remain contained.
The U.S. central bank last month cut rates for the third time this year and signalled a pause in the easing cycle that started in July when it reduced borrowing costs for the first time since 2008. That position was reiterated by Fed chair Jerome Powell in prepared testimony to lawmakers on Wednesday.
“There is little reason for the Fed to cut rates again any time soon,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa. “Inflation is not trending downward, the economy is just where so many of us thought it always was … that is, modest to moderate growth.”
The consumer price index increased 0.4 per cent last month as households also paid more for energy products, food and other goods. That was the largest gain in the CPI since March and followed an unchanged reading in September.
In the 12 months through October, the CPI increased 1.8 per cent after climbing 1.7 per cent in September.
Economists polled by Reuters had forecast the CPI advancing 0.3 per cent in October and gaining 1.7 per cent on a year-over-year basis.
Excluding the volatile food and energy components, the CPI rose 0.2 per cent after edging up 0.1 per cent in September. The increase in the so-called core CPI was limited by the retreat in rents, which blunted somewhat the surge in health-care costs and prices of used cars and trucks and recreation.
In the 12 months through October, the core CPI increased 2.3 per cent after rising 2.4 per cent in September.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2-per-cent inflation target. The core PCE price index rose 1.7 per cent on a year-over-year basis in September and has fallen short of its target this year. Although upbeat on the economy, Mr. Powell continued to describe inflation as “muted.”
The U.S. dollar briefly rose against a basket of currencies before ceding gains to trade flat. U.S. Treasury prices rose, while stocks on Wall Street were mixed.
Firming inflation comes on the heels of fairly upbeat data, including better-than-expected job growth in October and an acceleration in services sector activity.
There has also been a de-escalation of trade tensions between the United States and China. U.S. President Donald Trump on Tuesday said Washington was close to signing a “phase one” trade deal with Beijing, but provided no new details on negotiations.
Last month’s jump in health-care costs suggest an uptick in the core PCE price index last month. October producer price data set to be published on Thursday will shed more light on the core PCE price index, which will be released later this month.
In October, energy prices vaulted 2.7 per cent after falling 1.4 per cent in the prior month. Energy prices, which were also driven by more expensive electricity, accounted for more than half of the increase in the CPI last month.
Gasoline prices rebounded 3.7 per cent after declining 2.4 per cent in September. Food prices climbed 0.2 per cent, rising for a second straight month. Food consumed at home gained 0.3 per cent.
Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, climbed 0.2 per cent in October after rising 0.3 per cent in September. Other shelter categories also softened last month.
The cost of hotel and motel accommodation dropped 3.8 per cent. As a result, the rent index edged up 0.1 per cent last month, the smallest gain since April, 2011. But with rental vacancy rates remaining low, rents are likely to trend higher.
Health-care costs surged 1 per cent last month, the most since August, 2016, after climbing 0.2 per cent in September. Health-care costs were boosted by strong increases in the costs of hospital services and prescription medication. Health-care costs increased 4.3 per cent on a year-over-year basis in October.
“Fed officials should go to the doctor if they think there is no inflation in the economy,” said Chris Rupkey, chief economist at MUFG in New York.
Used motor vehicles and trucks prices increased 1.3 per cent after decreasing 1.6 per cent in September. The cost of recreation surged 0.7 per cent, the largest increase since February, 1996. Consumers also paid more for personal care products.
There was no sign that a recent increase in tariffs on a range of imported Chinese consumer goods were affecting consumer prices. Apparel prices fell 1.8 per cent after dropping 0.4 per cent in the prior month. Prices for household furnishings declined 0.2 per cent.
Prices for new motor vehicles declined for a fourth straight month. There were also decreases in the costs of household furnishings and airline fares.
Last month’s rise in overall inflation ate into households’ purchasing power, which could contribute to slowing consumer spending.
“While we expect the trend in inflation to firm, dimmer prospects for U.S. growth amid the ongoing trade war will likely prevent inflation from breaking meaningfully above the Fed’s target in the near-term,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, N.C.