Inflation cools to lowest level since January

Following another big rate hike by the Fed last week, inflation showed signs of cooling in October, as prices rose 0.4% compared to September and 7.7% compared to October

2021. While that’s still higher than anything seen in the past 40 years, it is the lowest reading since January, when prices had climbed 7.5% year-over-year.

A deceleration in food prices as well as decreases in prices for used cars, apparel and medical services helped keep inflation below expectations, despite a rebound in energy prices after three months of declines.

The less volatile core CPI-U excluding food and energy rose by 0.3% in October, half the rate of the previous month. Year-over-year, core inflation came in at 6.3%, slightly down from the September reading of 6.6%, which had been the highest since August 1982.

While Fed Chairman Jerome Powell acknowledged that “a series of down monthly readings” would be “good evidence” of inflation coming down at a press conference last week, Powell warned that he “never thought of that as the appropriate test for slowing the pace of [rate] increases,” which is why today’s reading likely won’t sway him toward a less hawkish stance in the short term.

When inflation started spiking in the spring/early summer of 2021, it was largely due to the so-called base effect, reversing the pandemic’s cooling effect on consumer prices a year earlier.

At the onset of the pandemic, prices had taken a dive due to a sudden drop in consumer spending and fuel demand before slowly climbing back to their pre-pandemic trajectory over the summer and fall.

Due to that initial dip in consumer prices, year-over-year comparisons were always going to be exaggerated for a while, but that is no longer the case. (Statista)