Higher Shelter Costs Bump Inflation up to 2.6%

U.S. consumer prices increased as expected in October amid higher costs for shelter such as rents, and progress towards low inflation has slowed since mid-year, which could result in fewer interest rate cuts from the Federal Reserve next year.

The report from the Labor Department on Wednesday, which also showed underlying inflation continuing to run a little warmer last month did not change expectations that the U.S. central bank would deliver a third rate cut in December.

"It is clear that the Fed's job is still unfinished," said Eugenio Aleman, chief economist at Raymond James.

The consumer price index rose 0.2% for the fourth straight month, the Labor Department's Bureau of Labor Statistics said. The increase was in line with economists' expectations.

A 0.4% rise in the cost of shelter, which includes rents as well as hotel and motel rooms, accounted for more than half of the increase in the monthly CPI. Shelter costs gained 0.2% in September. Food prices, which rose 0.2% after advancing 0.4% in September, also contributed to the increase in the CPI.

Grocery store food prices edged up 0.1% amid increases in the costs of bread, dairy products as well nonalcoholic beverages and fruits and vegetables, which more than offset cheaper meats, poultry and fish. Egg prices plunged 6.4%.

Gasoline prices continued to decline, falling 0.9%. But the cost of electricity jumped 1.2% and natural gas prices rose 0.3%.

In the 12 months through October, the CPI advanced 2.6% after climbing 2.4% in September. The uptick in annual inflation also reflected last year's low reading dropping out of the calculation.

Frustration over inflation helped to propel Republican Donald Trump to victory in last week's presidential election, defeating Democrat Party candidate and Vice President Kamala Harris.

Economists are, however, forecasting higher inflation next year if Trump forges ahead with his economic policies, including tax cuts and higher tariffs on imported goods. He has also vowed mass deportations of undocumented immigrants, which economists say will shrink the labor supply, raising costs for businesses that are then passed on to consumers.

REVISED RATE OUTLOOK

Though the U.S. central bank is expected to cut interest rates again in December, economists see the scope for more cuts next year as limited. U.S. Treasury yields have surged as investors expect the president-elect's policies will proceed unhindered, with Republicans controlling the U.S. Senate and on the verge of clinching the House of Representatives.

U.S. Treasury yields slipped after the in-line-with-expectations inflation data. The dollar hovered near 6-1/2-month highs against other major currencies.

Financial markets saw a roughly 79.3% probability of a 25 basis points rate cut at the Fed's Dec. 17-18 policy meeting, up from 58.7% before the data was published, according to CME Group's FedWatch Tool. The odds of rates being unchanged were at about 20.7% down from 41.3% earlier.

The annual increase in inflation has slowed considerably from a peak of 9.1% in June 2022, but remains above the Fed's 2% target. The central bank last week cut its benchmark overnight interest rate by 25 basis points to the 4.50%-4.75% range.

The Fed launched its policy easing cycle with an unusually large half-percentage-point rate cut in September, the first reduction in borrowing costs since 2020. It hiked rates by 525 basis points in 2022 and 2023 to tame inflation.

Inflation is showing signs of stickiness. Excluding the volatile food and energy components, the CPI increased 0.3% in October, rising by the same margin for the third consecutive month. The so-called core CPI was lifted by the rise in shelter.

Owners' equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting their property, climbed 0.4% after gaining 0.3% in September. The cost of hotel and motel rooms rebounded 0.5%.

HEALTHCARE COSTS

Medical care costs increased 0.3% after rising 0.4% in September. The government made changes to physicians' services and outpatient hospital services source data and methodology. Effective with the October CPI report, secondary source medical claims data for the private insurance portion of the physicians' services and outpatient hospital services indexes was used.

The cost of doctors' services increased 0.5% while prices for prescription medication rose 0.2%. Airline fares rose a strong 3.2%.

In the 12 months through October, the so-called core CPI gained 3.3%. That followed a similar advance in September.

Based on the CPI data, economists' estimates for the October core personal consumption expenditures (PCE) price index ranged from a 0.2% to 0.3% increase. The core PCE price index is one of the inflation measures tracked by the Fed for monetary policy. It gained 0.3% in September.

Core PCE inflation was forecast rising 2.8% year-on-year in October after increasing 2.7% in each of the prior three months.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)