Inflation holds steady; another rate hike likely

U.S. inflation showed little sign of breaking out in October despite strength in the economy and wages, probably keeping the Federal Reserve on its path of gradual interest rate increases.

Excluding food and energy, the core consumer price index rose 2.1% from a year earlier, according to a Labor Department report Wednesday, slightly short of the median estimate of economists for a 2.2% increase, also the gain in September. It was up 0.2% from September, the fastest month-to-month gain in three months and in line with projections.

The biggest gain in energy prices since January boosted the broader CPI, which rose 0.3% in October, matching estimates and following a 0.1% gain in September. It was up 2.5% from a year earlier, also in line with forecasts. The CPI report showed gasoline prices rose 3% from September on a seasonally adjusted basis.

There is “nothing in here that argues inflation is going to overshoot,” said Omair Sharif, senior U.S. economist at Societe Generale. Also, there’s little to concern policymakers, so they’ll “continue to stay gradual” with interest rate increases, he said.

Still, inflation is gradually gaining traction, with help from solid household demand and a tight job market, while the tariff war with China may further boost price pressures. At the same time, some of the latest advance reflected quirks such as a rebound in used-car prices, and the figures may potentially be seen as validating a recent decline in inflation expectations in financial markets, amid tumbles in crude oil and equities.

Investors expect the Fed to go ahead in December with this year’s fourth interest rate boost, and policymakers see several more increases in 2019. Although the Fed’s preferred gauge of inflation is a separate measure related to consumption, those October figures will be released on Nov. 29, making the CPI a key report at this time.

The Fed-preferred index and its core gauge both rose 2% in September from a year earlier; those measures tend to run slightly below the Labor Department’s CPI. Based on Wednesday’s numbers, Morgan Stanley projected the Fed’s preferred core price gauge cooled to a 1.8% annual gain in October.

The latest report brought the core CPI’s three-month annualized gain to 1.6%, the slowest in more than a year.