The US consumer price index (CPI) rose by 0.4% in September, according to the latest report from the Labor Department. This was slightly higher than the 0.3% increase that economists had forecast. However, the annual inflation rate eased to 3.7%, down from 3.8% in August and 9.1% in June.
The main driver of the CPI increase was a surprise surge in rental costs, which accounted for more than half of the rise. Shelter costs, which include rents and homeowners’ equivalent rent, jumped by 0.6%, the largest gain since February. This was at odds with the rising supply of multi-family housing and independent surveys showing asking rents declining.
Why did rents go up?
There is no clear explanation for why rents rose so much in September, as most indicators suggest that the rental market is softening. Some economists speculated that it could be due to higher rent increases in larger cities offsetting softer increases in smaller cities. Others suggested that it could be a temporary blip or a measurement error that would reverse in the coming months.
One possible factor that could have contributed to the rent surge is the end of the federal eviction moratorium, which expired on August 26. This could have allowed landlords to raise rents or evict tenants who were behind on their payments. However, some states and localities have extended their own eviction protections, which could limit the impact of the federal policy change.
How does this affect the Fed’s policy?
The unexpected rise in rents could pose a challenge for the Federal Reserve, which is trying to balance its dual mandate of price stability and maximum employment. The Fed has been signaling that it will start tapering its monthly bond purchases soon, possibly as early as November, as a first step toward normalizing its monetary policy.
However, the Fed has also said that it will not raise interest rates until inflation is moderately above its 2% target for some time and the labor market reaches full employment. The latest CPI report showed that inflation excluding food and energy, which the Fed prefers to focus on, slowed down to 2.8% on a yearly basis, the lowest since September 2021. This suggests that inflation pressures are moderating and moving closer to the Fed’s goal.
The labor market, on the other hand, remains far from full recovery, as the unemployment rate stood at 5.2% in August and the labor force participation rate was 61.7%, both well below their pre-pandemic levels. The Fed will likely wait for more data on both inflation and employment before making any decision on interest rates.
What does this mean for consumers?
The slowdown in inflation is good news for consumers, who have been facing higher costs for many goods and services amid supply chain disruptions and labor shortages. However, the surge in rents could hurt renters, who make up about one-third of US households. Rent is typically the largest expense for most renters, and it affects other measures of inflation such as the personal consumption expenditures (PCE) index, which the Fed uses as its preferred gauge of inflation.
Consumers can expect some relief from lower energy prices in October, as gasoline prices fell by 4 cents per gallon in the first week of the month, according to the Energy Information Administration. This was partly due to lower demand after the summer driving season and partly due to easing tensions in the Middle East after Saudi Arabia and Iran resumed talks.
However, food prices are likely to remain elevated, as grocery food prices rose by 0.1% in September and restaurant food prices increased by 0.4%. Food prices have been pushed up by higher costs of transportation, packaging, labor, and commodities such as corn, wheat, soybeans, and meat.