Consumer prices outside food and energy rose at their slowest pace in six months in September, a sign broad inflation pressures remained contained.
The core Consumer Price Index edged up just 0.1 percent, a Labor Department report showed on Wednesday, as the cost of apparel and used vehicles fell, new car prices held steady and rental-related costs rose only modestly.
While overall consumer prices rose a relatively steep 0.3 percent, taking the year-on-year rate to a three-year high of 3.9 percent, economists expect inflation to subside in the months ahead.
With households facing weak wage growth and tight budgets, it is difficult to see a sustained broad-based increase in prices. said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
Dutta and other economists said the report bolstered the Federal Reserve's view that inflation pressures will moderate as temporary factors such as high gasoline prices and disruptions to motor vehicle production fade.
Even though the core inflation has risen 2 percent over the past 12 months, economists said the Fed still has some wiggle room to ease monetary policy further if the recovery falters.
The U.S. central bank is searching for more ways to boost growth and lower an unemployment rate that has stubbornly remained above 9 percent. It has already cut overnight lending rates to near zero and pumped $2.3 trillion into the economy.
The Fed is unlikely to publicly crow about this CPI print, as headline inflation is still frustratingly high, but the easing in core inflation does validate the inflation forecast underpinning their recent policy moves, said Michael Feroli, an economist at JPMorgan in New York.
HOUSING STARTS JUMP
Recent economic data have suggested the U.S. economy fared much better in the third quarter than it did in the first half of the year, lessening the pressure for more monetary stimulus.
That positive tone on the economy was reinforced by a report from the Commerce Department on Wednesday that showed housing starts rose 15 percent to an annual rate of 658,000 units in September, well above economists' expectations for a 590,000-unit pace.
But that jump reflected a big surge in groundbreaking for multifamily dwellings. Single-family home construction -- which accounts for a larger share of the market -- rose just 1.7 percent and permits for future building fell 15 percent, a sign the housing market remains far from recovery.
Another report showed applications for home mortgages tumbled 14.9 percent last week as demand for both refinancing and purchases fizzled.
Financial markets largely shrugged off the data. U.S. stocks were mostly higher in late morning, while prices for longer-dated Treasury debt were marginally lower. The dollar was down against a basket of currencies.
CORE INFLATION MAY HAVE PEAKED
Core consumer prices last month were restrained by new motor vehicle costs, which were unchanged for a third straight month. This likely reflects a normalization in supplies after the March earthquake in Japan disrupted production.
A rolling three-month average suggests core inflation peaked earlier this year.
Prices for used cars and trucks fell 0.6 percent in September after months of gains. Apparel prices dropped 1.1 percent, the largest decline since September 1998.
There is high slack in the economy and consumers are price sensitive, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania. Given that the unemployment rate is 9.1 percent and wages are barely keeping up with inflation, businesses will have to swallow some of those (increased production) costs.
Shelter costs edged up 0.1 percent in September, the smallest rise since April, with owners' equivalent rent -- or OER -- rising 0.1 percent after a 0.2 percent in August.
But economists expect OER to rise in coming month as rental vacancies fall. OER gauges what homeowners would pay to rent their property or what they would earn from renting it.
While the Labor Department said a 2.9 percent increase in the price of gasoline pushed overall consumer prices last month, prices at the pump actually declined September and remain relatively steady.
The rise reported in the inflation report is probably has to do with the way the department adjusts the data try to smooth seasonal volatility, economists said.
(Additional reporting by Jason Lange; Editing by Neil Stempleman)