A closely watched report on US inflation showed consumer price increases ticked lower on an annual basis during the month of September but "core" prices remained sticky, according to the latest data from the Bureau of Labor Statistics released Thursday morning.

The Consumer Price Index (CPI) increased 2.4% over the prior year in September, a slight deceleration compared to August's 2.5% annual gain in prices. The yearly increase, which was the lowest annual headline reading since Feb. 2021, came in hotter than economist expectations of a 2.3% annual increase.

The index rose 0.2% over the previous month, matching the increase seen in August and also hotter than economist estimates of a 0.1% uptick.

On a "core" basis, which strips out the more volatile costs of food and gas, prices in September climbed 0.3% over the prior month, stronger than the 0.2% uptick economists had expected, and 3.3% over last year. Core prices rose 0.3% month over month and 3.2% on an annual basis in August.

Inflation, although moderating, has remained above the Federal Reserve's 2% target on an annual basis.

But the Federal Reserve has recently shifted its attention to the state of the labor market, which has been surprisingly resilient in the face of high interest rates.

Data from the Bureau of Labor Statistics released Friday showed the labor market added 254,000 payrolls in September, more additions than the 150,000 expected by economists, while the unemployment rate fell to 4.1% from 4.2%.

The strong report altered expectations about the path forward for interest rates, with traders now pricing in a smaller 25 basis point cut in November rather than another jumbo 50 basis point cut.

Minutes from the Federal Reserve released Wednesday showed that while a "substantial majority" of officials favored the larger cut at its September meeting, "some" wanted the smaller option, citing a resurgence in inflation as a primary concern.

On top of the inflation report, new jobless claims also came in hotter than expected, surging to their highest level since August 2023.

Following the data's release, markets were pricing in more than an 80% chance the central bank cuts by 25 basis points in November compared to just a 50% shot one month ago, per the CME FedWatch Tool.

"If inflation data continues to indicate that prices are generally rising amid a backdrop of a cooler labor market, the Fed's next meeting will undoubtedly involve a more heated discussion of which of the Fed's mandates takes precedence," Quincy Krosby, chief global strategist at LPL Financial, wrote on Thursday.

"Today's report is sure to spark concerns that a mild form of stagflation is beginning to take hold.

Shelter moderates, food remains sticky

Notable call-outs from the inflation print include the shelter index, which rose 4.9% on an unadjusted, annual basis, a deceleration from August's 5.2% increase. The index rose 0.2% month over month after rising 0.5% in August.

Shelter, along with the food index, which rose 0.4% month over month in September, contributed over 75% of the monthly increase in overall inflation.

Sticky shelter inflation has largely been blamed for higher core inflation readings, according to economists. But the moderation from August is an encouraging sign.

"September’s CPI report has good news and bad news for the Fed," Raymond James' chief economist Eugenio Aleman wrote in reaction to the report. "The good news is that shelter costs slowed down. ...However, it also showed that there are still plenty of upside risks for inflation going forward."

Read more: What is inflation, and how does it affect you?

The index for rent and owners' equivalent rent (OER) each rose 0.3% from August to September. Owners' equivalent rent is the hypothetical rent a homeowner would pay for the same property.

The lodging away from home index fell 1.9% in September, after rising 1.8% in August.

Meanwhile, the energy index decreased by 1.9% in September, after falling 0.8% in August as gas prices declined a sizable 4.1% last month. On a yearly basis, the energy index was down 6.8%.

The food index increased 2.3% in September over the last year, with food prices rising 0.4% month over month — proving to be a sticky category for inflation. The index for food at home rose 0.4% in September after prices were flat from July to August while food away from home increased 0.3%.

Other indexes with notable increases over the last year include motor vehicle insurance (+16.3%), medical care (+3.3%), personal care (+2.5%), and apparel (+1.8%).

The indexes for education, household furnishings and operations, personal care, used cars and trucks, and new vehicles also increased in September.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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