October’s inflation was unchanged from the previous month, which is encouraging because it suggests that the U.S. economy is starting to loosen its hold on persistently high prices and may signal that the Federal Reserve should stop raising interest rates.
In spite of remaining flat for the month, the consumer price index—which gauges a wide range of frequently used goods and services—rose 3.2% from a year ago, according to seasonally adjusted Labor Department data released on Tuesday. The Dow Jones survey of economists had been targeting figures of 3.3% and 0.1%, respectively.
In September, there was a 0.4% increase in the headline CPI.
The core CPI grew by 0.2% and 4% when volatile food and energy prices were excluded, compared to a forecast of 0.3% and 4.1%. The annual rate, which was down from 4.1% in September to its lowest point in two years, was still significantly higher than the Federal Reserve’s 2% target. As has been the case since April, Fed officials have emphasized that they would prefer to see a string of declines in core readings.
Markets surged after the announcement. Treasury yields dropped precipitously as the Dow Jones Industrial Average surged higher by almost 500 points. Additionally, based on data from CME Group, traders virtually completely wrote off the possibility of a Fed rate hike.
Given the continued slowdown in inflation, the Fed appears to have made a wise decision in ending its tightening cycle. Sit Fixed Income Advisors portfolio manager Bryce Doty stated, “Yearends are down significantly as the last of the investors who are not convinced the Fed is done are likely throwing in the towel.”
The month-over-month 2.5% decrease in energy prices offset a 0.3% increase in the food index, resulting in the headline CPI reading of flat. Since July 2022, this was the slowest monthly pace.
A major component of the index, shelter costs increased by 0.3% in October, which was half of the gain in September as the annual increase slowed to 6.7%. The measure of what property owners could charge for rent, known as owners equivalent rent, increased by 0.4% within the category. Prices in a subcategory that includes motels and hotels decreased by 2.9%.
Paul McCulley, a Georgetown University adjunct professor and former chief economist at Pimco, stated on “Squawk on the Street” that “this is a game changer.” “We’re experiencing a day of logical joy as the data distinctly demonstrate what we’ve been anticipating for quite some time—a break in the shelter component.”
The report described the return of inflation to healthy levels as “slow but clear progress,” according to Chicago Fed President Austan Goolsbee.
Car expenses, which had been a major driver of inflation during the 2021–2022 spike, decreased during the month. While used car prices were down 7.1% from a year ago and down 0.8%, new car prices saw a 0.1% decline.
Another element that is closely monitored, airfares, decreased by 0.9% and are down 13.2% yearly. On the other hand, auto insurance increased 1.9% and increased 19.2% over the previous year.
The report is released at a time when markets are keenly observing the Fed’s next move in the fight against ongoing inflation, which started in March 2022. In the end, the central bank raised its benchmark borrowing rate eleven times, or 5.25 percentage points.
Although the markets are largely of the opinion that the Fed has finished tightening monetary policy, recent data has produced mixed results.
Just 150,000 more people were employed in nonfarm payrolls in October, which suggests that the labor market is at last responding to efforts by the Fed to address a supply-demand imbalance that has been a contributing factor to inflation.
While productivity has increased this year, labor costs have increased over the previous 18 months at a far slower rate.
According to a separate Labor Department release, real average hourly earnings increased 0.2% on a monthly basis in October, but they were up just 0.8% from a year earlier, adjusted for inflation.
In general, the third quarter saw a sharp increase in the gross domestic product, growing at an annualized rate of 4.9%, despite the fact that most economists predict the growth rate to drop significantly.
Other data, however, indicates that consumer inflation expectations are still rising. This is probably due to the uncertainty brought on by the wars in Gaza and Ukraine as well as a spike in gas prices.
When Fed Chair Jerome Powell stated last week that he and other policymakers aren’t sure they’ve done enough to bring inflation back down to a 2% annual rate and won’t think twice about raising rates if more progress isn’t made, it further stoked market anxiety.
According to Jeffrey Roach, chief economist at LPL Financial, “despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to the long-run 2% target.”
The length of time the Fed will maintain benchmark rates at their highest point in almost 22 years is still up in the air, even if it decides to stop hiking.
