U.S. consumer prices offer mixed signals on inflation outlook

CORE CPI in October increased 2.1 percent from one year prior. / BLOOMBERG NEWS FILE PHOTO/ARIANA LINDQUIST
CORE CPI in October increased 2.1 percent from one year prior. / BLOOMBERG NEWS FILE PHOTO/ARIANA LINDQUIST

NEW YORK – An underlying measure of United States consumer prices picked up in October while trailing forecasts on an annual basis, offering mixed signs on inflation that will weigh on Federal Reserve discussions over the path of interest-rate increases.

Excluding food and energy, the core consumer-price index rose 0.2 percent from the prior month, according to a Labor Department report Wednesday, the fastest gain in three months and in line with projections. The gauge rose 2.1 percent from October 2017, slightly short of the median estimate of economists for a 2.2 percent increase, which was also the gain in September.

Inflation is gradually gaining traction, with help from solid household demand and a tight job market, while the tariff war with China may further boost price pressures. At the same time, some of the latest advance reflected quirks such as a rebound in used-car prices, and the figures may potentially be seen as validating a recent decline in inflation expectations in financial markets.

The broader consumer-price index rose 0.3 percent in October, matching estimates, after a 0.1 percent gain the prior month. It was up 2.5 percent from a year earlier, also in line with forecasts. The biggest gain in energy prices since January boosted the headline index. The CPI report showed gasoline prices rose 3 percent from the prior month on a seasonally adjusted basis.

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Investors expect the Fed to go ahead in December with this year’s fourth interest-rate hike, and policy makers see several more increases in 2019. While the Fed’s preferred gauge of inflation is a separate measure related to consumption, those October figures will be released on Nov. 29, making the CPI a key report at this time.

Core views

Policy makers and economists look at core inflation as a better indicator of underlying trends because the broader figures are subject to bigger swings from energy prices.

The Fed-preferred index and its core gauge both rose 2 percent in September from a year earlier; those measures tend to run slightly below the Labor Department’s CPI. Fed Chairman Jerome Powell’s speech on the economy Wednesday evening in Dallas may offer more clues on inflation and the path of interest rates.

The October advance in the CPI benefited from some bounce-back from September: used-car prices rose 2.6 percent, the most since 2009, after posting the biggest monthly drop in 15 years. The measure has been volatile since the Labor Department changed its methodology earlier in 2018.

New car prices, by contrast, weighed on inflation in October, falling 0.2 percent from the prior month, the biggest drop since April. Price gauges for communication, recreation and personal care also declined. Meanwhile, categories showing relatively slow increases included shelter, up 0.2 percent, while apparel costs rose 0.1 percent.

A separate report released Wednesday by the Labor Department showed inflation-adjusted hourly earnings fell 0.1 percent in October from the prior month. They were up 0.7 percent from a year earlier.

While the impact of tariffs is yet to show up in a big way in the CPI figures, economists say that may change as 10 percent tariffs on $200 billion of Chinese imports are due to rise to 25 percent in January in the absence of a breakthrough in negotiations. The Trump administration has also threatened to escalate tariffs to cover all imports from China.

Energy prices rose 2.4 percent from the previous month, while food costs fell 0.1 percent. Expenses for medical care rose 0.2 percent; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies. The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.

Shobhana Chandra is a reporter for Bloomberg News.