US consumer prices rise on food; Hurricane Helene muddies labor market picture

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Consumer price index increases 0.2% in September

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CPI rises 2.4% year-on-year, smallest gain since 2021

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Core CPI gains 0.3%; up 3.3% year-on-year

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Weekly jobless claims jump 33,000 to 258,000

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Continuing claims increase 42,000 to 1.861 million

By Lucia Mutikani

WASHINGTON, Oct 10 (Reuters) - U.S. consumer prices rose slightly more than expected in September amid higher food costs, but the annual increase in inflation was the smallest in more than 3-1/2 years, keeping the Federal Reserve on track to cut interest rates again next month.

Other data from the Labor Department on Thursday showed first-time applications for unemployment benefits surged last week to the highest level in more than a year, driven by Hurricane Helene and a nearly month-old strike at Boeing (BA).

The strike and hurricanes could cloud the labor market picture through the end of the year.

Despite the firmer-than-expected monthly inflation reading, a sharp moderation in rent increases led economists to expect a more muted rise in the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the U.S. central bank for its 2% target.

"Consumers might fixate on the firmness of inflation in categories like food, while the Fed might welcome the softer shelter reading finally starting to come through," said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. "Either way, inflation has been normalizing. As such, the evolution of the Fed's approach feels prudent."

The consumer price index increased 0.2% last month after gaining 0.2% in August, the Labor Department's Bureau of Labor Statistics said. Food prices jumped 0.4% after rising 0.1% in August. Grocery store food prices increased 0.4%, lifted by higher costs for meat, poultry, fish and eggs. Fruits and vegetable prices rebounded 0.9% after dropping 0.2% in August.

But consumers got some relief from gasoline prices, which plunged 4.1%. Rents increased 0.3% after climbing 0.4% in the prior month. In the 12 months through September, the CPI rose 2.4%. That was the smallest year-on-year increase since February 2021 and followed a 2.5% advance in August.

Economists polled by Reuters had forecast the CPI edging up 0.1% and rising 2.3% year-on-year. The annual increase in inflation has slowed from a peak of 9.1% in June 2022.

Inflation is a major issue for voters in next month's presidential election. Vice President Kamala Harris, the Democratic Party's nominee, is locked in a tight race with the Republican Party's candidate Donald Trump.

The Fed has mostly shifted focus to the labor market, delivering an unusually large 50 basis points rate cut in September. Minutes of that meeting published on Wednesday showed a "substantial majority" of policymakers supported starting an era of easier monetary policy with an outsized cut, but there appeared even broader agreement that the initial move would not commit the Fed to any particular pace of rate reductions in the future.

The first rate reduction since 2020 lowered the central bank's policy rate to the 4.75%-5.00% range. The Fed hiked rates by 525 basis points in 2022 and 2023. Financial markets saw a roughly 89% probability of a 25 basis points rate cut at the Fed's Nov. 6-7 policy meeting, according to CME Group's FedWatch Tool. The odds of rates being unchanged were at about 11%.

Stocks on Wall Street fell. The dollar edged up against a basket of currencies. U.S. Treasuries yields were mostly lower.

Excluding the volatile food and energy components, the CPI increased 0.3% after rising 0.3% in August, pointing to some stickiness in inflation. The so-called core inflation was driven by a rebound in the prices of used cars and trucks.

Healthcare costs rose 0.4%, lifted up by a 0.9% surge in the cost of doctor services. Prescription medication prices fell 0.5%. Motor vehicle insurance increased 1.2%, while apparel prices advanced 1.1%.

Airline fares cost 3.2% more. But owners' equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting their property, gained 0.3% after rising 0.5% in August.

Rents have been among the major drivers of inflation. The cost of hotel and motel rooms dropped 1.9%.

In the 12 months through September, the core CPI advanced 3.3% after gaining 3.2% gain in August.

Economists' estimates for the rise in the core PCE price index in September ranged from 0.16% to 0.23%. Core inflation ticked up 0.1% in August. Annual inflation was forecast rising 2.6% after advancing 2.7% in August. Friday's producer price data for September could change these estimates.

A separate report from the Labor Department showed initial claims for state unemployment benefits increased 33,000 to a seasonally adjusted 258,000,for the week ended Oct. 5, the highest level since early August 2023 amid weather and strike distortions. The increase was the largest since July 2021. Economists had forecast 230,000 claims for the latest week.

Unadjusted claims soared 53,570 to 234,780 last week. They were boosted by a 9,490 jump in claims in Michigan amid layoffs at Stellantis plants. The state also has a strong presence of Boeing (BA) suppliers. Filings in Ohio increased 4,328, blamed on Stellantis job cuts.

Claims in Washington State rose 1,744 and California reported a 4,484 increase, linked to the Boeing (BA) strike.

Applications shot up 8,534 in North Carolina and rose 3,843 in Florida. Helene, which tore through Florida and devastated large swathes of the U.S. Southeast in late September, is likely to continue boosting claims in the weeks ahead.

The labor market's short-term outlook is also likely to be muddied by Hurricane Milton, which barreled through Florida on Thursday, whipping up deadly tornadoes, destroying homes and knocking out power.

The roughly 33,000 machinists at Boeing (BA) who walked off the job last month could negatively impact October's employment report. Pay talks between the workers' union and planemaker collapsed on Tuesday.

Economists expect Fed officials will discount any sharp drop in payrolls or rise in the unemployment rate in October.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 42,000 to a seasonally adjusted 1.861 million during the week ending Sept. 28, the claims report showed.

"The storms and the strike will distort the October jobs report, pushing payroll job growth down substantially," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

"We expect the Fed will view the impact of these events on the labor market as temporary and won't let them determine their next policy move."

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