Core Inflation Higher; Consumer Spending Edges Up; Personal Incomes Rise

Core U.S. consumer prices rose by an expected 0.2 percent in September, but a year-on-year inflation index remained close to an 11-year high in a sign of persistent inflation risk, a government report showed on Monday.

Consumer spending and personal income also rose in the month.

The year-on-year rate of nonfood nonenergy inflation registered a strong 2.4 percent increase in September. However,it eased from a 2.5 percent gain in August, which was the biggest climb since April 1995.

Analysts were forecasting a 0.2 percent increase in the index for core personal consumption expenditures for September after the August figure came in at a 0.3 percent increase.

Just as the inflation figures were released, Federal Reserve Bank of Richmond President Jeffrey Lacker, speaking in Baltimore, said core inflation was running at an unacceptable rate on a long-term basis. Historically, the Fed's comfort level for annual core inflation has been in the 1 to 2 percent range.

The lone dissenter in recent Fed decisions to hold rates steady, Lacker said the inflation outlook was "discomforting".

"The economy is resilient enough right now to withstand further tightening," despite the slowdown in the housing market, Lacker said.

Overall inflation, as measured by a price index for consumer spending that includes food and energy, fell 0.3 percent in September after a 0.3 percent jump in August, the drop was largely attributed to falling gasoline prices.

U.S. Treasury debt prices, reacting as much to Lacker's comments as the consumer price data, held steady at higher levels, while the dollar edged lower against the euro but was slightly higher against the yen.

Investors for weeks have been trying to gauge when the Fed is likely to begin cutting rates again.

"The PCE numbers show and Lacker shows that this obsession with a rate cut is very premature," said Lara Rhame, senior currency strategist with Credit Suisse in New York.

Inflation-adjusted spending rose by 0.4 percent after a surprise fall of 0.1 percent in August. Analysts were expecting a 0.2 percent gain in this measure for September.

Personal income rose by 0.5 percent in September, ahead of analysts' forecasts of a 0.3 percent gain after it rose by an upwardly revised 0.4 percent in August.

Wages and salaries increased 0.5 percent after a 0.2 percent rise in August. The personal saving rate as a percentage of disposable personal income improved to a negative 0.2 percent from negative 0.5 percent the month before, but it was nevertheless the 18th consecutive negative reading in that category.