US CPI falls back more quickly than expected in September

The cost of living in the States slowed a tad more quickly than expected last month on the back of a large drop in the price of second hand vehicles and energy.

In September, the rate of increase in headline consumer prices ebbed to 0.1% month-on-month after a 0.2% rise in the month before, according to the Department of Labor.

Versus a year ago, CPI rose at a pace of 2.3%, which was down from August's clip of 2.7%.

According to Capital Economic's Michael Pearce, the move lower was chiefly the result of last year's 4.7% jump in energy costs - versus a 0.5% drop last September - dropping out of the calculations.

Indeed, Pearce expected headline CPI would continue to ebb over the next few months as last year's energy price gains continued to seep out of the year-on-year rte of change.

Food prices were unchanged versus the previous month with energy costs down by 0.5%, the latter occurred despite a 23.4% jump in fuel oil costs.

So-called 'core' CPI on the other hand, which excludes food and energy costs, was steady at 2.2% year-on-year and ahead by 0.1% on the month.

On a quarterly and annualised basis, core CPI was ahead by 1.8% "suggesting that underlying inflationary pressures have faded in recent months", according to Pearce.

Used car and truck prices were especially weaker, falling by 3.0% against August.

On this point, Ian Shepherdson at Pantheon Macroeconomics said: "The core [rate of CPI] was held down by a 3.0% m/m plunge in used car prices, which substantially overshot, relative to auction prices, over the summer. We feared a big drop was coming, but we thought it more likely to be spread over a couple of months. The key point is that it does not mark the start of a sustained downward trend."

New vehicle prices were also lower, declining by 0.3%, while medical care commodities' prices slipped by 0.1%.

Had it not been for the decline in used car prices, then CPI would have increased by 0.23% on the month, in line with the trend in place, Shepherdson added.

Going the other way, apparel prices recorded the biggest increase, climbing by 0.9%, while the cost of transportation services grew 0.5% dearer.

"Overall, the September figures confirm that core inflation has lost a little momentum in recent months, and the stronger dollar will put downward pressure on goods prices over the coming year or so," Pearce said.

"But with activity growth still strong and underlying inflation in the services sector still trending higher, we suspect the Fed will continue to raise interest rates over the coming quarters."

For his part, Shepherdson said: "Back-to-back 0.1% core readings will cheer battered stock and bond markets, but they don’t change the likely trajectory for interest rates. The Fed is focused on the very tight and tightening labor market and the threat of much faster wage gains, which the current zero level of real short rates will do nothing to constrain.

"Rates are being raised because of future inflation risk; these numbers don’t change that, and in any event a reversion to the core trend, 0.2%, is a very good bet for October."