US inflation rises 2.6% YoY in first annual acceleration since March; Wall Street sees fewer rate cuts in 2025

US inflation ticked higher in October 2024 amid higher costs for shelter after having slowed in September to their lowest pace since 2021, which led Wall Street to lower its bets for the US Federal Reserve's definite interest rate cuts in 2025. The data underscored the ongoing risks Fed policymakers face, trying to bring price pressures fully under control in the world's largest economy.

However, the report from Bureau of Labor Statistics released on Wednesday, November 13, which also showed underlying inflation continuing to run a little warmer in October, did not change expectations that the US Fed would deliver a third rate cut in December against the backdrop of a softening labor market.

US consumer price index (CPI) rose 2.6 per cent from a year earlier, up from 2.4 per cent in September, marking the first rise in annual inflation in seven months or the first acceleration on an annual basis since March. The US CPI rose 0.2 per cent for the fourth straight month in October when compared to September. Shelter accounted for over half of the overall monthly advance.

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The uptick in annual inflation also reflected last year's low reading dropping out of the calculation. Frustration over inflation helped to propel Republican candidate Donald Trump to victory in last week's presidential election, defeating Democratic Party candidate and Vice President Kamala Harris.

Economists are, however, forecasting higher US inflation next year if Trump forges ahead with his economic policies, including tax cuts and higher tariffs on imported goods. Trump has vowed to reduce inflation, mostly by ramping up oil and gas drilling. He has also vowed mass deportations of undocumented immigrants, which economists say will shrink the labor supply in the economy, raising costs for businesses that are then passed on to consumers.

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US Inflation in October 2024: Key Metrics

Excluding volatile food and energy costs, “core” consumer prices rose 3.3 per cent from a year earlier, just as in September. On a monthly basis, the US core CPI rose 0.3 per cent, rising by the same margin for the third consecutive month. Core CPI in October was lifted by the rise in shelter prices.

According to Bloomberg, over the last three months it rose at a 3.6 per cent annualized rate, marking the fastest pace since April. Economists see the core gauge as a better indicator of the inflation trend than the overall CPI. Over the long run, core inflation at that pace would exceed the US Federal Reserve’s two per cent target. 

Shelter prices, which includes rents as well as hotel and motel rooms and is the largest category within services, increased 0.4 per cent, marking an acceleration from the prior month. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose by the same amount. It is a measure of the amount homeowners would pay to rent or earn from renting their property.

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Food prices rose 0.2 per cent after advancing 0.4 per cent in September. Grocery store food prices edged up 0.1 per cent amid solid increases in the costs of bread, dairy products as well as nonalcoholic beverages and fruits and vegetables, which more than offset cheaper meats, poultry and fish. Grocery prices are up just 1.1 per cent over the past year, providing some relief to consumers after food costs surged roughly 23 per cent over the past three years.

Egg prices continue to be highly volatile. They fell 6.4 per cent just last month, though they're up more than 30 per cent from a year earlier. Gasoline prices eased further, falling 0.9 per cent. But the cost of electricity jumped 1.2 per cent and natural gas prices rose 0.3 per cent.

Goods prices excluding food and energy, meanwhile, rose for a second month. They had consistently fallen over much of the past year. However, excluding used cars, core goods prices fell 0.2 per cent, marking the largest drop in 2024.

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Prices of used cars rose 2.7 per cent, the most since May 2023, after having mostly declined for months before that. Auto dealers have mostly rebuilt their inventories after they were depleted during COVID, and in some cases dealers have had to offer incentives again to entice buyers. Compared with a year ago, average used car prices are still down 3.4 per cent.

Hotel rates climbed 0.4 per cent, possibly reflecting damage and evacuation orders from Hurricanes Helene and Milton. The cost of hotel and motel rooms rebounded 0.5 per cent. Airline fares rose a strong 3.2 per cent. Apparel prices dropped 1.5 per cent, the largest decrease since May 2020, leaving the overall goods prices unchanged.

Medical care costs increased 0.3 per cent after rising 0.4 per cent in September. The government made changes to physicians' services and outpatient hospital services source data and methodology. Effective with the October CPI report, secondary source medical claims data for the private insurance portion of the physicians' services and outpatient hospital services indexes was used.

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Health insurance costs jumped 0.5 per cent. The cost of doctors' services increased 0.5 per cent while prices for prescription medication rose 0.2 per cent. Motor vehicle insurance dipped 0.1 per cent. Overall services prices rose 0.4 per cent, matching September's gain.

US inflation data to keep Fed policymakers cautious

Though the US central bank is expected to lower rates again in December, economists see the scope for more cuts next year as limited. US Treasury yields have surged as investors expect the president-elect's policies will proceed unhindered, with Republicans controlling the US Senate and on the verge of clinching the House of Representatives.

Most of the September-to-October increase in consumer prices reflected a rise in rents and housing costs, a trend that Fed officials expect to fade in the coming months. The US economy is growing faster than expected. It has expanded at nearly a three per cent annual rate over the past six months, with consumers, particularly those with higher incomes, spending freely and fueling growth.

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The latest inflation numbers, along with strong consumer spending and economic growth, will keep US Fed officials cautious as they debate how quickly to reduce borrowing costs in the months to come. While the labor market is cooling, a retreat in inflation has been key to policymakers’ rationale for cutting interest rates.

At a news conference last week, US Fed Chairman Jerome Powell expressed confidence that inflation is still heading down to the central bank’s two per cent target, though perhaps slowly and unevenly. Powell also noted that most sources of price pressures are cooling, suggesting that inflation isn’t likely to accelerate in the coming months. 

Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. Wages are still growing and have outpaced prices for the past year and a half. But Powell noted that wages aren’t rising quickly enough to boost inflation. 

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The US Fed chair also observed that some sources of rising prices, like auto insurance, reflect changes that occurred during the COVID-19 pandemic, such as a spike in car prices that made them costlier to insure. Such “catch-up inflation,” in the US as the top Fed official called it, will likely fade over time.

After cutting interest rates by a quarter point last week, Fed Chair Jerome Powell said the election will have “no effects” on its decisions in the near term because it’s too early to know the timing or substance of any potential fiscal policy changes. The annual increase in US inflation has slowed considerably from a peak of 9.1 per cent in June 2022, but remains above the Fed's two per cent target. 

Overall, prices are still about 20 per cent higher than they were three years ago. The central bank last week cut its benchmark overnight interest rate by 25 basis points to the 4.50 per cent-4.75 per cent range. The US Fed launched its policy easing cycle with an unusually supersized half-percentage-point rate cut in September, the first reduction in borrowing costs since 2020. It hiked rates by 525 basis points in 2022 and 2023 to tame inflation.

With inputs from AP, Bloomberg, and Reuters