Inflation stayed pretty much even in September, with sky-high housing costs putting pressure on consumers.
But a steady decrease in “core” inflation — which exempts the more volatile categories of energy and food — is good news for price stability and is likely to assuage the Federal Reserve as it considers more interest rate hikes.
The consumer price index (CPI) advanced 0.4 percent in September to rise 3.7 percent above where it was a year ago. That’s slightly higher than what economists were expecting, but it’s down from August’s monthly increase of 0.6 percent and holds the annual increase from last month steady.
While the Fed is still projecting one additional quarter-point interest rate hike later this year, markets think the Fed is finished hiking.
Interest rate prediction algorithm Fedwatch by financial company CME put the odds of the Fed holding interest rates steady at its current range of 5.25 to 5.5 percent at 89.4 percent, as of Thursday morning.
Here’s a deeper look at the latest inflation numbers from the Labor Department and how they might affect you.
Core CPI cools while firming
The core CPI, which is a more important measurement than headline CPI for the Fed, has been steadily declining since March.
It fell to a 4.1-percent annual increase in September from 4.4 percent in August and 4.7 percent in July.
But the core’s three-month average is now trending upward, and that’s concerning some economists.
This is the “[second] month in a row of elevated core inflation … following [two] good months. Last month you could tout that the 3-month annualized growth rate was 2.4 percent and inflation was gone. Now that 3-month annualized growth rate is 3.1 percent [and] a bit more reason to be cautious,” Harvard University economist Jason Furman commented online Thursday morning.
“We’ll see what happens in the coming months but core CPI firmed up in September,” LinkedIn principal economist Guy Berger commented. “Running at 3.1 percent annualized over the past 3 months, [it’s] still a lot lower than a year earlier. Hopefully [it’s] just a bump in the road.”
Housing is the Achilles’ heel of the inflation that remains
Shelter costs are still outpacing headline inflation in the CPI by a long shot.
Shelter was up 7.2 percent annually in August, compared with the headline number of 3.7 percent and 4.1 percent rise in the core.
“The uptick in housing inflation this month was the key surprise. Housing inflation will need to decline sharply over the coming months for us to see inflation near 2 percent,” Olu Sonola, head of U.S. regional economics at Fitch Ratings, said in a statement.
“The slight uptick in month-over-month core CPI inflation … is owing entirely to shelter (housing). But a sustained drop in shelter inflation is around the corner, given that market rent growth remains tepid,” Preston Caldwell, an economist with Morningstar, said in analysis.
Shelter costs in the CPI have been coming down since March when they topped out at 8.2 percent. But the September number shows a deceleration in the pace of decline, falling just 0.1 percentage points annually from August to September.
Housing is one of the sectors of the economy that is most closely tied with interest rate hikes. The 30-year-fixed rate mortgage rate, which now stands at a 20-year high of 7.5 percent, has moved pretty much in tandem with the federal funds effective rate since 2021.
Inflation-adjusted earnings are falling
Real average hourly earnings for all employees decreased 0.2 percent from August to September on a seasonally adjusted basis, the Labor Department reported.
Real earnings decreased to $11.02 an hour in September from $11.04 in August and $11.08 in July. Real earnings are down on the year by 0.1 percent.
Nominal wage growth has also been decelerating and currently stands at a 4.2-percent annual increase, off a recent high of 5.9 percent annual growth in March of last year.
Some durable and non-durable goods are getting cheaper
The price of used cars and trucks fell 2.5 percent from August to September after dropping 1.2 percent the month prior. Used vehicle prices have been deflating since May.
Also getting cheaper are core commodities, which fell 0.4 percent on the month.
Apparel is down 0.8 percent, medical commodities are down 0.3 percent, and piped gas is down 1.9 percent.
“Durable goods inflation was driven lower by used car prices,” Morningstar’s Caldwell said. “Core nondurable goods inflation … continues to trend down, falling to 3.2 percent year-over-year in September, the lowest since 2021.”