Inflation decreased in October and showed hopeful signs of slowing down, according to recent data released on Tuesday. The report provided the Federal Reserve with renewed evidence that its efforts to combat rapid inflation are effective, and likely reduced the necessity for further rate hikes.
The overall Consumer Price Index slowed to 3.2 percent last month on a year-over-year basis, lower than the 3.7 percent reading in September and the coolest since July. This decrease was partly due to more moderate energy prices.
Even when volatile fuel and food prices were excluded, a closely watched “core” price measure climbed 4 percent in the year through October, slower than the previous reading and weaker than what economists had anticipated.
Inflation has significantly decreased over the past year after reaching just above 9 percent on an overall basis in the summer of 2022. Fed officials are aiming to bring price increases back to around the 2 percent pace that was normal before the pandemic by increasing interest rates, which they hope will slow down consumer and business demand.
Although price increases have noticeably cooled over the past year, the downward trend had stalled in the months leading up to Tuesday’s report.
Supply chain problems that had driven up the costs of many goods reversed, allowing prices for items like bicycles and bed frames to stop rising so quickly or even decline. However, housing and other service cost increases, which are more closely tied to the strength of the overall economy, had begun to prove more persistent.
The recent data indicated that progress has resumed on those critical fronts. A closely watched measure of housing costs moderated after unexpectedly ticking up in September. A measure of inflation in other services — which includes everything from manicures to health care — also decreased notably, to the slowest pace since late 2021 based on Bloomberg calculations.
Overall, the data provided clear signs that inflation is heading in the right direction — a positive development for central bankers as they attempt to moderate the economy just enough to reduce price increases without significantly dampening its momentum and causing a severe 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.”
Fed officials are closely monitoring inflation figures as they contemplate their next actions. Policymakers have raised interest rates to a range of 5.25 to 5.5 percent, up from near zero as recently as March 2022.
They are currently deliberating whether a final quarter-point rate adjustment is necessary — and Tuesday’s report led many investors and economists to speculate that a final increase is unlikely.
Stocks soared following the latest numbers, and the S&P 500 closed nearly 2 percent higher. The milder inflation numbers have raised hopes among investors that the Fed will maintain steady interest rates. The two-year Treasury yield, which is sensitive to changes in interest rate expectations, dropped significantly after the release.
“There could be bumps along the way, but I’m really encouraged by the reading,” said Kathy Bostjancic, Nationwide’s chief economist. “It reduces the pressure on policymakers to raise rates further.”
Officials have stated that they intend to maintain interest rates at elevated levels even after they cease raising them, aiming to continue exerting downward pressure on consumer and business demand by making it more costly to borrow money.
Despite the progress in curbing inflation, central bankers may be hesitant to declare victory.
For one thing, they are not completely out of the woods. If consumer and investor inflation expectations continue to rise, it could become a concern for Fed officials. A five-year-ahead measure produced by the University of Michigan has inched higher, as have some market-based indicators. Policymakers have so far maintained an optimistic outlook regarding these developments.
Officials also tend to avoid relying on one or two positive numbers, concerned that the gains could be reversed.
“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” Jerome H. Powell, the Fed chair, said last week.
However, many economists anticipate further decreases in inflation in 2024. Goldman Sachs analysts predicted in a research note this week that there will be “further disinflation in the pipeline” stemming from the automobile, rental, and labor markets.
At present, Mr. Goldberg suggested that policymakers are likely to shift their focus toward economic growth, monitoring signs of a sustainable slowdown.
Assuming demand weakens as anticipated, it should prompt consumers to become or remain price sensitive — compelling retailers and service providers to either lower prices or risk deterring shoppers.
For some product providers, this shift is already evident. Rachel Glaser, the chief financial officer at the online crafts marketplace Etsy, stated during a recent presentation that the platform had traditionally competed by offering unique products rather than lower prices. However, as consumers become increasingly selective, this 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.”
