By Lucia Mutikani

WASHINGTON (Reuters)

U.S. consumer prices increased as expected in October amid rising shelter costs like rents. Progress towards lower inflation has slowed since mid-year, possibly leading to fewer interest rate cuts from the Federal Reserve next year.

The Labor Department's report on Wednesday showed that underlying inflation remained a bit higher last month, yet it did not alter expectations for 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 (CPI) rose 0.2% for the fourth consecutive month, aligning with economists' expectations. A 0.4% rise in the cost of shelter, including rents and hotel/motel rooms, accounted for over half of the monthly CPI increase. Shelter costs gained 0.2% in September. Food prices also increased by 0.2% after a previous 0.4% rise.

Grocery food prices ticked up by 0.1%, with bread, dairy, and nonalcoholic beverages contributing to the rise, offsetting cheaper meat, poultry, and fish. Notably, egg prices fell 6.4%.

Gasoline prices dropped 0.9%, but electricity costs surged by 1.2% and natural gas rose by 0.3%.

In the 12 months through October, the CPI advanced by 2.6%, up from 2.4% in September. This annual inflation increase reflects last year’s low readings dropping out of the calculation.

Frustration with inflation contributed to Donald Trump’s victory over Kamala Harris in the recent presidential election. Economists predict higher inflation next year if Trump implements his economic policies, including tax cuts and tariffs on imports.

The U.S. central bank is forecasted to cut interest rates again in December, but the potential for further cuts next year appears limited. U.S. Treasury yields rose as investors expect the president-elect's policies to continue, with Republicans controlling the Senate and potentially the House of Representatives.

Financial markets view a 79.3% probability of a 25 basis points rate cut at the Fed's Dec. 17-18 meeting, a rise from 58.7% before the inflation data.

Inflation has significantly slowed from a peak of 9.1% in June 2022, yet it remains above the Fed's 2% target. Last week, the Fed cut the benchmark interest rate by 25 basis points to a range of 4.50%-4.75%.

The Fed began its easing cycle with a notable half-percentage-point cut in September, the first reduction since 2020. It had previously raised rates by 525 basis points in 2022 and 2023 to combat inflation.

Inflation shows signs of stickiness. Excluding volatile food and energy, the CPI rose 0.3% for the third straight month due to shelter increases. Owners' equivalent rent climbed 0.4% after a 0.3% gain in September, while hotel room rates rebounded by 0.5%.

Medical care costs rose by 0.3% following a 0.4% increase in September. Changes in methodology for physician services and outpatient services data came into effect with the October CPI report.

Doctors' service costs increased by 0.5%, and prescription medication prices rose by 0.2%. Airline fares jumped by 3.2%.

Over the 12 months through October, the core CPI gained 3.3%, matching the prior month's advance. Based on CPI data, economists estimated a core personal consumption expenditures (PCE) index increase of 0.2%-0.3% in October, forecasting a year-on-year rise of 2.8% after a 2.7% increase in previous months.