U.S. consumer prices were unchanged in September and underlying inflation retreated, supporting expectations the Federal Reserve will cut interest rates in October for the third time this year amid risks to the economy from trade tensions.
A strong labor market could, however, complicate matters for the Fed amid divisions among officials on the appropriate response to the rising headwinds to growth. Other data on Thursday showed an unexpected decline in the number of Americans filing claims for unemployment benefits last week.
Layoffs remain low even as companies are becoming hesitant to hire more workers because of a slowing economy. The unemployment rate is near a 50-year low of 3.5%.
The longest economic expansion on record, now in its 11th year, is under threat from the 15-month-old U.S.-China trade war, slowing growth overseas and a likely disorderly exit from the European Union by Britain. The trade war has undermined business investment and helped to drive manufacturing into recession. Growth is also being restricted by the fading stimulus from last year's $1.5 trillion tax cut package.
"The downside risks from slower global growth, trade disruptions and the contraction in U.S. manufacturing could carry more weight among Fed officials," said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. "The odds of a rate cut in October are moving up with domestic economic data turning softer in recent months."
The Labor Department said the flat consumer price index last month was the weakest reading since January and came as increases in the cost of food and rents were offset by decreases in the prices of gasoline and used cars and trucks. The CPI edged up 0.1% in August. In the 12 months through September, the CPI increased 1.7% after advancing by the same margin in August.
Economists polled by Reuters had forecast the CPI nudging up 0.1% in September and rising 1.8% on a year-on-year basis.
Excluding the volatile food and energy components, the CPI climbed 0.1% after gaining 0.3% for three straight months. The so-called core CPI was restrained by moderate gains in healthcare costs, as well as declines in apparel, new motor vehicles and communications prices. In the 12 months through September, the core CPI increased 2.4%, matching August's rise.
The report came on the heels of data on Tuesday showing the biggest drop in producer prices in eight months in September.
Minutes of the U.S. central bank's Sept. 17-18 policy meeting published on Wednesday showed that while officials agreed risks to the economy "had increased somewhat," they were divided on what the appropriate response should be.
The minutes showed "several" favored keeping rates unchanged at that meeting as they felt the policy stance was "already adequately accommodative," while a "couple" preferred a 50 basis point rate cut.
The Fed cut rates by a quarter point last month after reducing borrowing costs in July for the first time since 2008. A further reduction is expected at the Oct. 29-30 meeting.
U.S. stocks rose after President Donald Trump confirmed he would meet Chinese Vice Premier Liu He on Friday for further trade talks, raising hopes for a deal. The dollar weakened against a basket of currencies. U.S. Treasury prices fell.
LAYOFFS REMAIN LOW
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2.0% inflation target. The core PCE price index rose 1.8% on a year-on-year basis in August and has fallen short of its target this year.
Economists said based on the CPI and PPI data, they expected the monthly core PCE price index to tick up 0.1% in September, matching August's gain. That would lower the annual increase in core inflation to 1.7% from 1.8% in August.
While benign inflation has increased households' purchasing power and boosted consumer spending, it has led to moderate annual increases for Americans receiving Social Security benefits. Based on July, August and September inflation data, recipients could see a 1.6% cost of living adjustment in the new fiscal year, according to Labor Department calculations.
Economists expect inflation will pick up and breach the Fed's target in 2020 following the recent broadening of U.S. tariffs on Chinese goods to include a range of consumer goods. A tightening labor market is also expected to support inflation.
In another report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 210,000 for the week ended Oct. 5.
Economists had forecast claims unchanged at 219,000 in the latest week. Employers are holding on to their workers, even as demand for labor is ebbing.
"While the claims data have been upbeat, we still have seen job growth slow lately, with this cooling tied primarily to reduced hiring rather than increased layoffs," said Daniel Silver, an economist at JPMorgan in New York.
Job openings fell to a 1-1/2-year low in August. Nonfarm payrolls rose by 136,000 jobs in September, down from 168,000 in August. The three-month average gain in private employment fell to 119,000, the smallest since July 2012, from 135,000 in August.
The CPI report showed gasoline prices declined 2.4% after falling 3.5% in August. Food prices gained 0.1% after being unchanged for three straight months. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3% in September after rising 0.2% for two consecutive months.
Healthcare costs climbed 0.2% last month after jumping 0.7% in August, which was the biggest gain in three years. Apparel prices fell 0.4% after gaining 0.2% in the prior month.
Used motor vehicles and trucks prices decreased 1.6% in September, the most in a year, after rising for three straight months. Prices for new motor vehicles dipped 0.1%. There were increases in the costs of household furnishings, motor vehicle insurance, airline fares and tobacco.
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