Inflation slows faster in U.S. than predicted

October prices report seen as sign rate hikes working

WASHINGTON — Inflation in the United States slowed last month in a sign that the Federal Reserve’s interest rate increases are cooling the retail price spikes that have bedeviled consumers for the past two years.

Tuesday’s report from the Labor Department showed that prices either fell or rose more slowly across a broad range of goods and services, including gasoline, new and used cars, hotel rooms and housing. Overall inflation was unchanged from September to October, down from the 0.4% jump the previous month. Compared with 12 months ago, consumer prices rose 3.2% in October, down from the 3.7% rise in September and the smallest year-over-year increase since June.

Altogether, the data provided clear signs that inflation is headed in the right direction — an optimistic development for central bankers as they try to cool the economy just enough to bring down price increases without curbing its momentum so much that they spur a painful recession.

“It does suggest that inflation is continuing to slow down,” said Gennadiy Goldberg, a rates strategist at TD Securities, noting that while it was just one report, it was an encouraging one. “It is being driven by multiple things, not just one quirk.”

Excluding volatile food and energy prices, so-called core prices also slowed. They rose just 0.2% from September to October, slightly below the pace of the previous two months. Economists closely track core prices, which are thought to provide a good sign of inflation’s future path. Measured year over year, core prices rose 4% in October, down

from 4.1% in September, the smallest rise in two years.

“The inflation fever has broken,” said Bill Adams, chief economist at Comerica Bank. “Rising petroleum production is holding down gas prices, house prices are rising more slowly after mortgage rates surged in 2023 and rents are also rising more gradually” as more apartment buildings are completed.

Gasoline prices fell 5% from September to October and are down 5.3% from a year earlier. They have continued to fall into November, suggesting that cheaper energy could hold down inflation this month as well. The national average pump price was $3.35 on Tuesday, down 42 cents from a year ago.

Grocery store prices rose 0.3% last month and 2.1% from a year earlier. Though still above pre-pandemic inflation, the year-over-year rise is down from double-digit increases earlier this year. Bread and beef prices surged in October and are much more expensive than they were a year ago. Milk and egg costs ticked higher last month but have fallen compared with last year.

October’s milder-than-expected price figures make it much less likely that the Fed will impose another rate increase, economists said. Fed officials, led by Chair Jerome Powell, are considering whether their benchmark rate is high enough to quell inflation or if they need to impose another increase in coming months.

Powell had said last week that Fed officials were “not confident” that rates were sufficiently high to tame inflation. The Fed has raised its benchmark interest rate 11 times in the past year and a half, to about 5.4%, the highest level in 22 years.

But the central bank has raised its key rate just once since May. Since its last meeting on Nov. 1, a government report showed that hiring cooled in October compared with September, and wage growth slowed, easing pressure on companies to raise prices in the coming months.

Adams, echoing other economists, said he thinks the Fed’s most likely next move will be to cut rates, likely by mid-2024.

“There could be bumpiness along the way, but I’m really encouraged by the [inflation] reading,” said Kathy Bostjancic, Nationwide’s chief economist. “It reduces the pressure on policymakers to raise rates further.”

The prospect that the Fed may end its rate increase campaign and eventually cut rates fueled a stock market rally Tuesday. The Dow Jones industrial average soared nearly 1.4% and the S&P 500 rose 1.9%. The yield on the benchmark 10-year Treasury note fell to 4.44%, down from nearly 4.6%, reflecting investors’ expectations that borrowing rates will move lower.

“The bar for further rate hikes is getting higher and higher,” Wells Fargo & Co. Chief Economist Jay Bryson said on Bloomberg TV after Tuesday’s report. “This is a good start in that journey, but you would need to see a few more months of 0.2 [the October core inflation increase] before saying mission accomplished.”

The Fed’s rate increases have pushed up the costs of mortgages, auto loans, credit cards and many forms of business borrowing, part of a concerted drive to slow growth and cool inflation pressures.

“Things are proceeding in a way that is very consistent with what [the Fed] would want to see,” said Eric Winograd, chief economist at AB Global, an asset management firm. “They look like they are on course to generate a soft landing. There’s no guarantee that they will actually manage to accomplish it. But right now, that’s the story that the data are telling.”

Prices first accelerated in 2021 as consumers stepped up spending amid a fading pandemic. Much greater demand ran headlong into snarled supply chains, which led retailers and other companies to quickly increase prices. Inflation has since eased as supply chains have improved and higher borrowing rates have weakened some industries, notably housing.

Improved supply chains have helped reduce the prices of new and used vehicles, with used-car prices falling for five straight months. New car prices fell 0.1% in October despite worries among many economists that the now-settled autoworkers’ strike would reduce dealer inventories and force up prices.

The costs of apartment rents and overall housing also slowed in October after an uptick in September. Rents rose just 0.3% from September to October, half the pace of the previous month. Compared with a year ago, rents are still up 6.7%, a sizable increase that has made housing less affordable. Even with the smaller increase, rental and housing costs accounted for two-thirds of the increase in core inflation compared with a year ago.

Many economists say a key reason why most Americans hold a gloomy view of the economy despite very low unemployment and steady hiring is that the costs of things they buy regularly — gas, meat, bread and other groceries — remain much higher than they were three years ago.

Assuming consumer demand weakens as expected, it should prod consumers to become or remain price-sensitive — forcing retailers and service providers to either charge less or risk scaring away shoppers.

For some goods providers, that shift is already obvious. Rachel Glaser, the chief financial officer at the online crafts marketplace Etsy, said during a recent presentation that the platform had traditionally competed by offering unique products, rather than lower prices. But as consumers prove increasingly choosy, that is changing.

“We haven’t really competed or tried to compete on price,” she said during a September presentation. “But in this environment, we’ve started to lean a little bit into discounting.”