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Consumer price index increases 0.2% in October

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Shelter accounts for more than half of rise in CPI

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CPI advances 2.6% year-on-year; base effects also a factor

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Core CPI gains 0.3%; up 3.3% year-on-year

By Lucia Mutikani

WASHINGTON, Nov 13 (Reuters) - U.S. consumer prices

increased as expected in October amid higher costs for shelter

such as rents, and progress towards low inflation has slowed

since mid-year, which could result in fewer interest rate cuts

from the Federal Reserve next year.

The report from the Labor Department on Wednesday, which

also showed underlying inflation continuing to run a little

warmer last month did not change expectations that the U.S.

central bank would deliver a third rate cut in December.

"It is clear that the Fed's job is still unfinished," said

Eugenio Aleman, chief economist at Raymond James.

The consumer price index rose 0.2% for the fourth straight

month, the Labor Department's Bureau of Labor Statistics said.

The increase was in line with economists' expectations.

A 0.4% rise in the cost of shelter, which includes rents as

well as hotel and motel rooms, accounted for more than half of

the increase in the monthly CPI. Shelter costs gained 0.2% in

September. Food prices, which rose 0.2% after advancing 0.4% in

September, also contributed to the increase in the CPI.

Grocery store food prices edged up 0.1% amid increases in

the costs of bread, dairy products as well nonalcoholic

beverages and fruits and vegetables, which more than offset

cheaper meats, poultry and fish. Egg prices plunged 6.4%.

Gasoline prices continued to decline, falling 0.9%. But the

cost of electricity jumped 1.2% and natural gas prices rose

0.3%.

In the 12 months through October, the CPI advanced 2.6%

after climbing 2.4% in September. The uptick in annual inflation

also reflected last year's low reading dropping out of the

calculation.

Frustration over inflation helped to propel Republican

Donald Trump to victory in last week's presidential election,

defeating Democratic Party candidate and Vice President Kamala

Harris.

Economists are, however, forecasting higher inflation next

year if Trump forges ahead with his economic policies, including

tax cuts and higher tariffs on imported goods. He has also vowed

mass deportations of undocumented immigrants, which economists

say will shrink the labor supply, raising costs for businesses

that are then passed on to consumers.

Though the U.S. central bank is expected to cut interest

rates again in December, economists see the scope for more cuts

next year as limited. U.S. Treasury yields have surged as

investors expect the president-elect's policies will proceed

unhindered, with Republicans controlling the U.S. Senate and on

the verge of clinching the House of Representatives.

U.S. Treasury yields slipped after the

in-line-with-expectations inflation data. The dollar hovered

near 6-1/2-month highs against other major currencies.

AREAS OF STICKINESS REMAIN

Financial markets saw a roughly 79.3% probability of a 25

basis points rate cut at the Fed's Dec. 17-18 policy meeting, up

from 58.7% before the data was published, according to CME

Group's FedWatch Tool. The odds of rates being unchanged were at

about 20.7% down from 41.3% earlier.

The annual increase in inflation has slowed considerably

from a peak of 9.1% in June 2022, but remains above the Fed's 2%

target. The central bank last week cut its benchmark overnight

interest rate by 25 basis points to the 4.50%-4.75% range.

The Fed launched its policy easing cycle with an unusually

large half-percentage-point rate cut in September, the first

reduction in borrowing costs since 2020. It hiked rates by 525

basis points in 2022 and 2023 to tame inflation.

Inflation is showing signs of stickiness. Excluding the

volatile food and energy components, the CPI increased 0.3% in

October, rising by the same margin for the third consecutive

month. The so-called core CPI was lifted by the rise in shelter.

Owners' equivalent rent, a measure of the amount homeowners

would pay to rent or earn from renting their property, climbed

0.4% after gaining 0.3% in September. The cost of hotel and

motel rooms rebounded 0.5%.

Medical care costs increased 0.3% after rising 0.4% in

September. The government made changes to physicians' services

and outpatient hospital services source data and methodology.

Effective with the October CPI report, secondary source medical

claims data for the private insurance portion of the physicians'

services and outpatient hospital services indexes was used.

The cost of doctors' services increased 0.5% while prices

for prescription medication rose 0.2%. Airline fares rose a

strong 3.2%.

In the 12 months through October, the so-called core CPI

gained 3.3%. That followed a similar advance in September.

Based on the CPI data, economists' estimates for the October

core personal consumption expenditures (PCE) price index ranged

from a 0.2% to 0.3% increase. The core PCE price index is one of

the inflation measures tracked by the Fed for monetary policy.

It gained 0.3% in September.

Core PCE inflation was forecast rising 2.8% year-on-year in

October after increasing 2.7% in each of the prior three months.