US inflation advances to 2.6%

Washington — US consumer prices increased as expected in October amid higher costs for shelter such as rents, as slowing progress on bringing down inflation could result in fewer interest rate cuts from the Federal Reserve in 2025.

The report from the labour department on Wednesday, which also showed underlying inflation continuing to run a little warmer in October, did not change expectations that the US 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 (CPI) rose 0.2% for the fourth straight month, the department’s Bureau of Labor Statistics said. Year on year, the CPI advanced 2.6% after climbing 2.4% in September.

A 0.4% month-on-month 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%.

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

Frustration over inflation helped to propel Republican Donald Trump to victory in the November 5 presidential election, defeating Democratic candidate and vice-president Kamala Harris.

Economists are, however, forecasting higher inflation in 2025 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 labour supply, raising costs for businesses that are then passed on to consumers.

Though the US central bank is expected to cut interest rates again in December, economists see the scope for more cuts next year as limited in 2025.

US treasury yields have surged as investors expect the president-elect’s policies will proceed unhindered, with Republicans controlling the Senate and on the verge of clinching the House of Representatives.

US treasury yields slipped after the unsurprising inflation data. The dollar hovered near six-and-a-half month highs against other major currencies.

Stickiness

Financial markets saw a roughly 79.3% probability of a 25 basis point rate cut at the Fed’s December 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 25bps to the 4.5%-4.75% range.

The Fed launched its policy easing cycle with an unusually large 50bps cut in September, the first reduction in borrowing costs since 2020. It hiked rates by 525bps 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 core CPI was lifted by the rise in shelter.

Medical care costs increased 0.3% after rising 0.4% in September.

Reuters