By Lucia Mutikani
WASHINGTON (Reuters) - U.S. private-sector employers hired the fewest workers in six months in October while tepid domestic demand kept inflation benign last month, suggesting the economy was still in need of stimulus from the Federal Reserve.
The slowdown in private job growth was the latest signal that the labor market has taken a step back in recent months and the clearest indication yet that a 16-day federal government shutdown weighed on economic activity.
Fed officials stuck to their monthly $85 billion bond-buying pace at the end of a two-day meeting on Wednesday and said fiscal policy was restraining economic growth.
"It (data) suggests accommodative policy might be necessary for longer and more aggressive monetary policy might be needed to break the lack of momentum in the economy," said Laura Rosner, an economist at BNP Paribas in New York.
Employers in the private sector added 130,000 new jobs to their payrolls this month, the ADP National Employment Report showed on Wednesday. That was the lowest reading since April and was below economists' expectations for a gain of 150,000 jobs.
It was the fourth straight month that private jobs growth slowed, according to the ADP data. There was a marked slowdown in hiring by small businesses, where payrolls increased 37,000 last month, well below the 68,000 new jobs created in September.
Mid-sized firms also hired fewer workers than in September.
"The government shutdown and debt limit brinkmanship hurt the already softening job market in October," said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pennsylvania.
Moody's Analytics is a joint developer of the ADP report.
While the ADP data does not have a good track record of predicting the government's more comprehensive non-farm payrolls count, it suggested that report will find weakness as well.
The government will publish its closely watched payrolls report on November 8. Payrolls gained 148,000 in September, with the unemployment rate hitting a near five-year low of 7.2 percent.
But if average monthly jobs growth continues at less than 150,000, where it has been over the last three months, that would make it difficult for the jobless rate to fall further.
In a separate report, the Labor Department said its Consumer Price Index increased 0.2 percent last month as a rebound in energy prices offset an unchanged reading in food costs. The CPI had edged up 0.1 percent in August.
In the 12 months through September, the CPI increased 1.2 percent, the smallest gain since April.
FED TO STAY THE COURSE FOR A WHILE
The weak labor market picture and benign inflation environment should allow the Fed to stay the course on its monthly bond purchases for a while as it tries to stimulate the economy through low interest rates.
The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI.
"We do not expect tapering (of bond purchases) to begin before January at the earliest," said Michael Hanson, an economist at Bank of America Merrill Lynch in New York.
But traders read the Fed's statement as being a bit hawkish. U.S. stocks fell in choppy trade, while the dollar advanced against a basket of currencies. Prices for U.S. Treasury debt surrendered early gains and were last trading lower.
There was no sign of underlying inflation pressures last month. The so-called core CPI - which strips out the volatile energy and food components - nudged up 0.1 percent. It rose by the same margin in August.
Last month's rise took the increase in the core index over the past 12 months to 1.7 percent after advancing 1.8 percent in August.
This measure touched a two-year low of 1.6 percent in June and the slowdown last month could catch the attention of some Fed officials who are concerned about inflation being too low.
Last month, inflation was lifted by a 0.8 percent rise in energy prices, which accounted for about half of the rise in the CPI. Energy prices had dropped 0.3 percent in August.
Food prices were flat in September, producing the weakest reading since May.
Shelter and medical care costs accounted for most of the increase in the core CPI last month. Owners' equivalent rent of primary residence rose 0.2 percent after rising 0.3 percent in August. It is the biggest single component in the CPI.
Medical care costs increased 0.3 percent, with hospital services rising 0.7 percent. Medical care, which makes up more than 9 percent of the core index, has been one of the key contributors to the low inflation early in the year.
Apparel prices recorded their biggest drop since March.
"Inflation remains tame, although the recent trend toward slowing still appears to have stopped, even with the dip in the change from a year ago in core in September," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics, in Valhalla, New York.
(Additional reporting by Luciana Lopez in New York; Editing by Dan Grebler)