Rents Underpin U.S. Consumer Prices as Fuel Costs Plunge

Consumer prices in the U.S. excluding food and fuel increased more than forecast in September, propelled by rising rents. Plunging energy expenses caused total costs to decrease by the most since January.

The so-called core price measure, which strips out often-volatile food and fuel, climbed 0.2 percent, the most in three months, a Labor Department report showed Thursday in Washington. The total consumer-price index decreased 0.2 percent last month after falling 0.1 percent in August.

The Federal Reserve is looking for signs that inflation will drift back toward their 2 percent target as they try to time their first interest-rate increase since 2006. Higher housing costs are likely to underpin the cost of living as demand for rental units remains solid amid limited supply.

Housing is “still probably the biggest support of inflation,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who correctly forecast the overall index. “Inflation is generally well-contained, however if you strip out the impact of energy prices, we are seeing a bit firmer pricing picture.”

Another Labor Department report showed the number of Americans filling applications for jobless benefits last week matched the lowest in four decades. Initial unemployment claims dropped by 7,000 to 255,000 in the period ended Oct. 10. That equaled the low reached in mid-July as the fewest since November

1973.

The drop in consumer prices matched the median of 79 economists in a Bloomberg survey. Estimates ranged from a 0.4 percent decline to a 0.2 percent increase.

12 Months

The cost of living was little changed in the 12 months ended September, while the core index increased 1.9 percent, the most since July 2014.

The core gauge was projected by the Bloomberg survey to rise 0.1 percent last month from August, and 1.8 percent from last year.

Energy costs slumped 4.7 percent in September after falling 2 percent the month before. Gasoline dropped 9 percent, the most since January. The nationwide average cost of a gallon of regular gasoline was $2.30 as of Wednesday, compared with $3.19 a year ago, according to AAA, the biggest U.S. auto group.

Cheaper fuel, along with the overall price declines, may be helping consumers stretch their paychecks a little further. Hourly earnings adjusted for inflation rose 2.2 percent in September from a year earlier, a separate report from the Labor Department showed. Compared with the prior month, real earnings climbed 0.1 percent.

Fed’s View

Fed officials have said sluggish inflation is tied to transitory factors such as falling oil costs, though their preferred measure of price pressures linked to consumer spending hasn’t reached the central bank’s 2 percent goal since April

2012.

Policy makers want to be reasonably confident that inflation is rising toward that target before raising their benchmark interest rate. However policy divisions were exposed this week as Governors Daniel Tarullo and Lael Brainard argued that the current environment may warrant patience on raising rates. Fed Chair Janet Yellen has said she expects it will be appropriate to raise rates before the end of this year, provided the economy grows as the central bank predicts.

Housing costs have been supporting inflation of late. Rents on primary residences increased 0.4 percent in September, the most since June. The measure has climbed 2 percent over the past six months, the most since 2007. Owners-equivalent rent, one of the categories designed to track rental prices, rose 0.3 percent in September.

Goods, Services

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Other inflation data sets have not been encouraging. The Labor Department’s gauge of wholesale prices, which includes 75 percent of all U.S. goods and services, fell 0.5 percent in September and followed an unchanged reading the prior month, data showed Wednesday.

A report last week showed the cost of imported goods excluding fuel declined 3.1 percent from a year before, the largest such drop since October 2009.

Thursday’s consumer-price report also indicated retired workers receiving Social Security benefits will receive no cost of living adjustment in 2016. It’s up to the Social Security Administration to issue the official figures based on the data.

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