Inflation rose 0.4 percent in September, a near standstill from August, according to the latest Consumer Price Index Thursday. Economists believe “shelter” will soon recede as the largest contributor to runaway prices.

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As Federal Reserve bankers continue to struggle to rein in runaway prices, shelter is poised to recede as a driving contributor, according to the U.S. Bureau of Labor Statistics’ latest Consumer Price Index on Thursday.

Inflation rose a modest 0.4 percent in September and 3.7 percent annually, a near standstill from a month earlier. Housing once again dominated as the largest contributor to rising prices, accounting for more than half of the increase, according to the data. Rising gasoline prices were also a contributing factor.

“Inflation that is stuck at 3.7 percent, coupled with the strong September employment report, could be enough to prompt the Fed to indeed go for one more rate hike this year,” Bright MLS Chief Economist Lisa Sturtevant said in a statement.

Overall, shelter costs rose 7.2 percent annually while rental costs increased 7.4 percent. Rental costs, however, lag behind the Consumer Price Index, which some experts predict will show up in the form of slowing housing inflation in the CPI due to a gradual decrease in asking rents.

“Shelter accounts for approximately one-third of overall CPI, but lags real-time data by six-12 months, meaning weakness in the rental market is just starting to show up in the CPI,” First American Economist Ksenia Potapov said in a statement. “With time, shelter is poised to drag down overall inflation.”

The 3.7 percent annual increase remains well above the Federal Reserve’s target of 2 percent annual inflation. Alongside September’s strong employment report, further increases could result in yet more interest rate increases, economists warned.

Other economists, however, argued that without the volatility of food and fuel, the inflation index would otherwise measure 4.1 percent annually, down from 4.3 percent in August, meaning inflation is decreasing at a faster rate without its most volatile indices. That, taken with the likelihood of housing inflation shrinking over the next several months, indicates that a rate hike was becoming less likely.

“The September CPI report paints an encouraging picture as far as the Federal Reserve is concerned,” Potapov said. “Inflation is trending downward, especially after stripping out the volatile food and energy components, while the largest monthly contributor, shelter, is set to decline in the months ahead.”

Potapov also cited the recent increase in bond yields — which effectively serve as a rate hike by increasing the cost of borrowing — as cause to believe the Fed would hold off on rate hikes at its next meeting.

Mortgage rates hit 7.67 percent this week according to the Mortgage Bankers Association — a 20 year high — as demand for housing neared a multi-decade low.

Email Ben Verde

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