Progress lowering US consumer inflation stalling; rate cut pace uncertain in 2025

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Consumer price index increases 0.2% in October

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Shelter accounts for more than half of rise in CPI

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CPI advances 2.6% year-on-year; base effects also a factor

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

By Lucia Mutikani

WASHINGTON, Nov 13 (Reuters) - U.S. consumer prices increased as expected in October amid higher costs for shelter such as rents, and progress toward low inflation has slowed in recent months, 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 against the backdrop of a softening labor market.

"Progress on inflation has started to stall," said Michael Pugliese, a senior economist at Wells Fargo. "The time is fast approaching when the Fed will signal that the pace of rate cuts will slow further, perhaps to an every-other-meeting pace starting in 2025."

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 rose 0.2% after advancing 0.4% in September. Grocery store food prices edged up 0.1% amid solid increases in the costs of bread, dairy products as well as nonalcoholic beverages and fruits and vegetables, which more than offset cheaper meats, poultry and fish. Egg prices plunged 6.4%.

Gasoline prices eased further, 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 Democratic 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.

Though the U.S. central bank is expected to lower 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.

"Many of these policies are more inflationary than deflationary, at least in the very near term," said Richard de Chazal, macro analyst at William Blair. "The risk this time around is that consumers' willingness and ability to absorb another round of inflation is much more fragile, and it may not take much to start pushing up those all-important longer-term inflationary expectations."

U.S. Treasury yields initially slipped after the in-line-with-expectations inflation data, before reversing course. The dollar hovered at a 6-1/2-month high against other major currencies. Stocks on Wall Street were mostly higher.

SOME STICKINESS REMAINS

Financial markets saw a roughly 82.3% 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 17.7% 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.

Some sticky inflation patches remain. 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%. Airline fares rose a strong 3.2%.

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%. Motor vehicle insurance dipped 0.1%. Overall services prices rose 0.4%, matching September's gain.

Used cars and trucks prices accelerated 2.7%, the most since May 2023. Apparel prices dropped 1.5%, the largest decrease since May 2020, leaving the overall goods prices unchanged.

In the 12 months through October, the core CPI gained 3.3%. That followed a similar advance in September. Core inflation increased at a 3.6% annualized rate in the last three months.

Based on the CPI data, economists' estimates for the October core personal consumption expenditures (PCE) price index ranged from a 0.2% to 0.26% 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. October's producer price data due on Thursday could change these estimates.

"This lack of progress in reducing core inflation should raise concern among policymakers that further progress towards the 2% inflation target may have stalled out and policy may not be as restrictive as the majority at the Fed thought," said Conrad DeQuadros, senior economic advisor at Brean Capital.

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