US core inflation returns to four-decade high as rents rise

Bloomberg

A key gauge of US consumer prices advanced to a 40-year high in September, underscoring persistent,
elevated inflation that’s squeezing households and pushing the Federal Reserve towards another steep interest-rate hike.
The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labour
Department data showed on Thursday. From a month earlier, the core CPI climbed 0.6% for a second month.
The overall CPI increased 0.4% last month, and was up 8.2% from a year earlier. The median forecasts in a Bloomberg survey of economists had called for a 0.4% monthly rise in the core and a 0.2% gain in overall measure.
The report underscores the enormous role played by one component in particular — housing. Even so, analysts are seeing signs that core inflation has peaked and is finally on a downward slope, though the decline may take time.
“We’re probably near a peak, but that being said, I don’t think we’re going have a speedy return to lower numbers in part because” of the persistence of rental inflation, said Michael Feroli, chief US economist at
JPMorgan Chase & Co.
Shelter makes up about a third of the overall basket of consumer prices, and an even larger share of the so-called core CPI. The run-up in rents and housing prices over the past two years has slowly fed into the Bureau of Labour Statistics’ CPI figures, fueling massive jumps in the indexes for rent of primary residence and owners’ equivalent rent.
Both increased 0.7% in August and were up the most since 1986 on an annual basis. Deutsche Bank economists expect both metrics to rise by yet another 0.7%.
These measures are a key factor for the ultimate path of US inflation and are poised to keep a floor under inflation prints well into next year, before recent signs of a cooling in asking rents begin filtering into the government’s measure.
Fed Governor Christopher Waller reinforced this thought when he said last week that he’s closely watching shelter inflation “in determining” his outlook for US inflation. He went on to say that “unfortunately, the message is that shelter inflation will likely remain high for several months.”
Societe Generale SA Chief US Economist Stephen Gallagher sees a relatively rapid deceleration in core CPI towards 4% over the coming year, but said it gets “incredibly challenging” to continue to see inflation drop when rents are still growing at a rapid pace. He noted that a softer labour market is needed to slow rent inflation to a degree that is consistent with the Fed reaching its
ultimate inflation goals. But even excluding food, energy and shelter, inflation is still extremely high — up 6.4% in August from a year earlier.
The Fed is “not raising rates just because shelter is high, they’re raising rates because so much of the basket is growing much faster than they want to see it growing,” said Omair Sharif, founder and president of Inflation Insights. That said, “my feeling is this is the start of a much more sustained period of softer core CPI prints.”
Used car and truck prices, a key driver of inflation last year drop for a third straight month, but by a much greater extent. Sharif expects used car prices to fall 2% in September, a reflection of both a decline in wholesale used-car prices and the way the government adjusts the price data each September for differences in the quality of newer cars in the sample.
Geopolitical developments threaten to complicate matters in the coming months. Russia’s war with Ukraine continues to disrupt various commodity supplies, and oil prices climbed higher after the Opec+ alliance agreed to cut output last week.
Retailers are announcing widespread price cuts and sales to clear inventory, and the strength of the US dollar compared to other currencies is likely to weigh on foreign demand for American goods.
Similarly, medical care is set to turn negative starting with the October report after solidly advancing for much of the last year, Sharif said.