U.S. Inflation Shows Signs of Cooling
Consumer Price Index data released Thursday showed that inflation was finally showing signs of a meaningful slowdown, more than a year and a half after it started to pick up amid the pandemic.
While price increases remain unusually rapid, the October data provided a welcome moment of relief for the White House and the Federal Reserve, as the numbers suggested that price jumps might finally begin to ebb.
Here are the takeaways from the latest data:
The Consumer Price Index was up 7.7 percent in October compared with the year before, down from an 8.2 percent annual pace in the previous month.
After stripping out food and fuel prices, which jump around, the core index was up 6.3 percent, down from 6.6 percent previously.
On a monthly basis, inflation slowed notably in October after stripping out food and fuel, with prices climbing just 0.3 percent between September and October, down from 0.6 percent in the previous report. That was the slowest since September 2021.
October’s slowdown came even as gas prices helped to boost the overall number: Gasoline prices increased 4 percent last month, though natural gas fell 4.6 percent. Overall, energy costs were up 1.8 percent.
Housing inflation makes up a big chunk of the overall price measure, and it is still running hot. Rent of primary residence in October climbed 0.7 percent from the prior month, and is up 7.5 percent over the past year. The approximate cost of renting an owned home has climbed 6.9 percent over the past year. Those measures are expected to slow in 2023.
Food inflation is also rapid. The cost of groceries is up 12.4 percent over the past year, and the cost of food at restaurants is up 8.6 percent.
While some types of service costs are climbing rapidly, airfares dropped in October, declining by 1.1 percent on a monthly basis. Wireless telephone services and sporting events also got cheaper.
The underlying details of the report were also encouraging: A slowdown in goods inflation that economists had long anticipated finally showed up, with prices for used cars and clothing falling markedly last month. And in services, part of a slowdown came from an expected decline in medical care costs, but some discretionary purchases also became cheaper, with a fall in airfares and sporting event tickets.
The report provides early evidence that the Fed’s campaign to slow rapid inflation may be combining with supply chain healing to ease price pressures. The central bank has lifted interest rates from near zero to above 3 percent this year as it tries to slow consumer and business demand and give supply a chance to catch up. Thursday’s report suggested that may be happening — which could improve the outlook for what central bankers often call a “soft landing,” a situation where price gains slow without a painful recession.
“This morning’s C.P.I. data were a welcome relief,” Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, said in a speech shortly after the report was released. “But there is still a long way to go.”
Inflation is expected to remain rapid through the end of 2022, though there are reasons to hope that it could moderate even more meaningfully in 2023. Rent inflation is expected to slow at some point next year. Health insurance, which has been slightly adding to inflation, is now beginning to slightly subtract from it because of the way it is calculated — that is expected to continue going forward.
“This is not some kind of outlier print,” Omair Sharif, founder of Inflation Insights, wrote in a note following the release.
But other forces could keep inflation elevated. A big question going forward is what will happen to prices for nonhousing services: Pet care, child care, health care, manicures, meals out and the like.Prices in those categories are closely tied to wage gains, which have been climbing swiftly in recent months. If that continues, it could be hard for inflation to fall the whole way back to the roughly 2 percent pace that was normal before the pandemic. Companies are likely to try to pass rising labor bills along to consumers in the form of higher prices.
“Inflation is slowing and there is room for the good news to continue in the coming months,” Neil Dutta, the head of economics at Renaissance Macro, wrote in a research note after the data release. But a continued slowdown in inflation is far from assured: The economy is still resilient, which could make it hard for inflation to make the long journey back to normal without further cooling in demand.
“Stronger real growth will put pressure on capacity, and that challenges the immaculate disinflation thesis,” Mr. Dutta wrote.
The new inflation data is important in assessing the progress of the Fed’s efforts to reduce stubbornly high inflation by slowing the economy through higher interest rates, which have also contributed to the substantial decline in the stock market this year.
Speaking before the numbers released, some analysts and investors cautioned that it would take a more prolonged period of slowing inflation before the Fed stopped raising interest rates.
Still, “it could be the first step to getting us to a better place,” Ron Temple, the head of U.S. equity at Lazard Asset Management, said on Wednesday.
The Fed chair, Jerome H. Powell, took a hard line at the central bank’s meeting last week, saying that the job of lowering inflation was far from over. Rate increases in the coming months may not be as large as the bumper three-quarter-point moves of the past four Fed meetings, but he said that over time, rates could rise higher than investors had been expecting.
Having pushed expectations of future interest rate increases higher following Mr. Powell’s comments, investors reassessed their expectations after seeing the new inflation numbers.
“We believe this is yet another triumph of hope over reality,” John Lynch, chief investment officer for Comerica Wealth Management, said on Thursday. “Sustained price pressures in housing, wages and energy indicate a prolonged battle against inflation. Indeed, Fed Chair Jerome Powell last week was unambiguous in his comments that rates would remain higher for longer.”
Nonetheless, investors have priced out any chance of a fifth consecutive three-quarter point increase in December, instead anticipating a smaller 0.5 percentage point increase to the Fed’s policy rate.
Market expectations for where interest rates will move to next year dropped from a peak of more than 5 percent to around 4.9 percent on Thursday, as investors dialed back expectations of the number of interest rate increases to come.
The yield on the two-year Treasury bond, which is sensitive to changes in Fed policy, plummeted by more than 0.2 percent, to around 4.4 percent. The dollar also fell swiftly, down 1 percent against a basket of currencies that represent the United States’ major trading partners.
