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U.S. Consumer Prices Trail Forecasts as Used-Car Costs Drop

Reade Pickert

(Bloomberg) -- A key measure of U.S. consumer prices rose by less than expected in September as used-car costs fell by the most in a year, potentially bolstering the case for the Federal Reserve to cut interest rates for the third time in three months.

The core consumer price index, which excludes food and energy, increased 0.1% from the prior month, a Labor Department report showed Thursday, below the median estimate of economists. The annual gain of 2.4% matched projections as well as the August increase. The broader CPI was unchanged on the month and up 1.7% annually, trailing projections.

The subdued monthly reading could reinforce investor bets that the Fed will ease policy later in October as the global picture darkens and the trade war worsens. Officials favoring a reduction may see little risk that inflation will jump above the central bank’s price goal and a danger that trade tensions will persist for some time.

“The overall inflation picture remains roughly consistent with the Fed’s target and looks to be staying there,” said Sarah House, senior economist at Wells Fargo & Co. “It definitely takes away some of the ammunition of the hawks that were looking for more evidence of a slowdown and also just balancing the two sides of the mandate, but I think in general the Fed hasn’t been terribly concerned about the upside trend in inflation recently.”

Trade Talks

Even so, additional tariffs could still pass through to prices paid by consumers. On Sept. 1 President Donald Trump initiated fees on about $112 billion in Chinese products and the Asian nation immediately retaliated. Chinese and American negotiators are holding face-to-face talks in Washington this week, with levies set to rise further barring any truce.

A separate Labor Department report Thursday showed filings for unemployment benefits fell to a three-week low of 210,000, indicating that while job gains are slowing, layoffs and firings remain limited.

Ten-year Treasury yields climbed to the day’s highs after the data, and as traders prepared for a 30-year bond auction later Thursday.

Vehicle Prices

The weaker-than-expected CPI figures reflected a 1.6% monthly drop in used-car prices, while new vehicle costs fell 0.1% for the third straight decline. Apparel prices decreased 0.4%, the first drop since April.

Other categories were firmer. Shelter, which makes up about a third of total CPI, rose 0.3% in September following a 0.2% gain. Owners-equivalent rent, one of the categories that tracks rental prices, increased 0.3%.

The Labor Department’s CPI gauge tends to run faster than the Commerce Department’s personal consumption expenditures price index, the measure officially targeted by the Fed for 2% inflation. Policy makers look to the core PCE index for a better read on underlying price trends. That measure has shown signs of firming, increasing 1.8% annually in August, the most since January.

On the CPI, energy prices fell 1.4% in September, the fourth drop in five months, as gasoline declined 2.4%. Food was up 0.1%, the first increase in four months.

Prices for medical care rose 0.2%, the least since February, though components were mixed: physicians’ services costs increased, hospital services were unchanged and prescription drugs fell 0.5%.

Health insurance prices rose 1.4% in September. In the prior month, the index for such costs surged by a record 1.9%, though it’s not directly based on prices paid by consumers; instead, it’s an indirect measure based on retained earnings, or what insurers have after paying out claims.

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A separate Labor Department report Thursday showed average hourly earnings, adjusted for price changes, rose 1.2% in September from a year earlier, following 1.4% in August, as nominal wage gains cooled.An unofficial Social Security cost-of-living adjustment, based on Labor Department data, was 1.6%. That’s based on the annual change in a third-quarter measure of consumer prices.Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2% from the prior month and 2.4% from a year earlier, with the broader index seen rising 0.1% monthly and 1.8% on a yearly basis.

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--With assistance from Jordan Yadoo, Sophie Caronello and Edward Bolingbroke.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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