Inflation hit a fresh three-year low in September as another drop in gasoline prices offset a rise in used car and auto insurance costs. But price gains slowed less than expected and a gauge of underlying price increases picked up.
Overall consumer prices increased 2.4% from a year ago, down from 2.5% in August, according to the Labor Department’s consumer price index, a wide-ranging gauge of goods and services costs. That’s the smallest increase since February 2021 and the sixth straight pullback, leaving inflation modestly above the Fed’s 2% goal. Economists polled by Bloomberg, though, expected a drop to 2.3%.
On a monthly basis, costs edged up 0.2%, in line with the previous month.
The latest pullback likely should still keep the Federal Reserve on track to lower interest rates by a more measured quarter percentage point next month after its initial half-point reduction in September juiced the stock market.
What is the core inflation rate today?
Core inflation, which excludes volatile food and energy items and is watched more closely by the Fed, increased 0.3%, similar to August. That nudged up yearly core inflation to 3.3% from 3.2% the month before. Forecasters expected the core measure to hold steady.
Food and energy prices are often more volatile because they respond to the sharp price swings of global commodities such as oil and wheat. The Fed prefers to focus on more sustained price changes that reflect consumer and business demand and can be affected by interest rates.
What is the Fed interest rate today?
After slashing a key interest rate by a half point in September, Fed officials signaled they’ll probably lower it by a quarter point at each of their final two meetings this year as long as inflation continues to soften. That would reduce the rate from about 4.8% to about 4.3%.
With inflation seemingly headed toward the Fed’s 2% target, it likely would take an unusually weak, or strong, labor market to alter officials’ blueprint for quarter-point rate cuts, Bank of America wrote in a note to clients. U.S. employers unexpectedly added a booming 254,000 jobs in September, calming fears of substantially weakening employment growth and a possible recession.
Thursday's slightly hotter-than-expected inflation report probably keeps the Fed on course to reduce rates by a quarter percentage point next month, some economists said, but it virtually rules out another half-point cut. And if job growth surges again in October, the Fed may have to considering pausing, some forecasters suggested.
"This is not what the Fed wanted to see after its bold move in September and virtually rules out another large cut in November," economist Sal Guatieri of BMO Economics wrote in a note to clients. "While we still lean toward a quarter-point reduction, much will depend on whether we see a second straight strong jobs report in October."