Consumer inflation was unchanged in October compared to the previous month, marking what could be a pivotal moment in the battle against skyrocketing prices. The flat reading provides hope that the tight grip of stubborn inflation may be easing on the U.S. economy. It could give the Federal Reserve the green light to halt interest rate hikes after an aggressive series of increases this year.
The consumer price index, which measures inflation through a wide basket of goods and services, rose 3.2% from a year ago. Both the monthly and annualized figures came in below economist expectations, sparking a rally on Wall Street.
Excluding volatile food and energy costs, the core CPI increased 0.2% month-over-month and 4% year-over-year. The annual gain was the smallest since September 2021. Economists predicted the core index would climb 0.3% and 4.1% respectively. The consistent deceleration of the core rate since April is a positive sign for the Fed.
Energy prices fell 2.5% in October, offsetting a 0.3% uptick in food costs. The food index rise was the smallest monthly increase since July 2022. Energy declines helped flatten the total CPI reading.
Slowing Home Costs Offer Relief
Home costs have been a major pain point during the inflation surge. But shelter inflation showed signs of easing in October. Overall shelter costs rose just 0.3%, down from 0.6% the prior month. The annual shelter increase slowed to 6.7% from 7.2% in September.
Owners’ equivalent rent, which estimates rental rates for homeowners, ticked up 0.4%. Hotel and motel prices dropped 2.9%, likely helped by declining demand as budgets tighten.
“This is a game changer,” said Paul McCulley, former chief economist at Pimco. “We’re having a day of rational exuberance, because the data clearly show what we’ve been waiting for for a long time, which is a crack in the shelter component.”
Used car prices have plunged after huge gains during the pandemic. The index tracking used vehicle costs sank 0.8% in October and tumbled 7.1% over the past year. New car prices dipped 0.1% for the month. Airfares also dropped 0.9%, down 13.2% from October 2021.
But motor vehicle insurance jumped 1.9% last month, up 19.2% annually. Rising insurance costs are still squeezing household budgets.
Fed Policy Outlook
Markets are laser focused on the Fed’s next moves in combatting stubborn inflation. The CPI report sparked predictions that the central bank’s rapid interest rate hikes are likely over.
The Fed kicked off an aggressive tightening cycle in March, lifting its benchmark rate 11 times to a range of 3.75%-4%. That took borrowing costs from near-zero to the highest level since 2007. The goal is to cool demand and bring prices back toward the Fed’s 2% target.
Following the inflation data, traders bet the Fed would not hike rates again at all, according to CME Group. The odds of a half-point December increase evaporated. Markets rallied strongly on hopes that more Fed tightening is off the table.
But inflation remains well above the Fed’s goal. Policymakers have stressed they need to see a consistent downtrend in the core CPI before declaring victory.
Fed Chair Jerome Powell said last week the central bank is not convinced it has done enough to control prices. He indicated officials are prepared to raise rates again if inflation does not keep slowing.
Still, the October figures offer hope that Fed rate hikes are beginning to work their way through the economy. Other data also hints that supply and demand may be rebalancing after pandemic distortions.
Job Gains Moderating
The October jobs report showed some cooling in the hot labor market. Payroll growth totaled just 150,000, suggesting tighter Fed policy is having an impact. Wage growth has also slowed over the past year, easing pressure on employers.
Rising productivity this year has helped keep labor cost inflation in check. Unit labor costs were up 3.5% in the third quarter from a year ago, far below the blistering pace set last year.
But inflation expectations have drifted higher recently, likely due to higher gas prices and geopolitical tensions. Households anticipate prices will rise 5.1% over the next year, according to the New York Fed’s October survey. That’s up from 4.7% in September and remains uncomfortably high.
The Fed faces a tricky balancing act in calibrating policy. More interest rate hikes risk tipping the economy into recession. But moving too slowly could allow inflation to become entrenched.
October’s inflation data provides some reassurance that prices are beginning to ease. But the Fed is unlikely to declare victory yet. Officials still have a long way to go before inflation returns sustainably to 2%.
More gradual price declines will likely be needed before the central bank pauses its tightening campaign. But the October figures offer hope that the inflation fever may finally be breaking.
Conclusion
October’s flat monthly inflation reading marks a tentative positive development in the battle against rising prices. The data indicates the Fed’s aggressive interest rate hikes could be having the desired effect of cooling demand and rebalancing the economy.
But policymakers will need to see a consistent downward trajectory in core inflation before halting rate hikes. One month of moderating price increases is not enough to declare victory over stubborn inflation.
Still, the October figures provide some hope that inflation may have peaked. Slowing shelter cost inflation is particularly welcome news for strained household budgets. Used car price declines are also helping ease overall inflation.
However, price stability remains elusive. Inflation expectations have drifted higher amid gas price spikes. The Fed must tread carefully to avoid recession while ensuring inflation continues slowing towards the 2% target.
More evidence of demand cooling and inflation moving decisively lower will likely be needed before the central bank pauses rate hikes. But October’s flat CPI print offers the first tangible sign that the Fed’s tightening campaign may be turning the corner on runaway inflation.
