There is hope that the fastest price increases in decades are slowing down after U.S. inflation decreased in October by more than expected.
Inflation in the United States fell more than expected in October, providing hope that the fastest price increases in decades are slowing and allowing Federal Reserve officials to ease up on their steep interest-rate hikes.
According to a Labor Department report released Thursday, the consumer price index was up 7.7% year on year, the smallest annual increase since the beginning of the year, and down from 8.2% in September. A 40-year high was reached in the previous month, but core prices, which don’t include food and energy and are thought to be a better underlying indicator of inflation, increased by 6.3%.
The core consumer price index rose 0.3% from the previous month, while the overall CPI rose 0.4%. Both the annual and monthly increases were less than the median economist estimate.
While the slowing of core prices is encouraging, inflation remains far too high for the Fed to be comfortable. In addition to stating earlier this month that officials need to observe a regular pattern of lower monthly inflation, Chair Jerome Powell hinted that interest rates will likely peak higher than originally anticipated.
The core measure was constrained by drops in the price indices for used cars and medical care services. More than half of the increase in the CPI as a whole was caused by higher housing costs.
While U.S. stock futures soared and the dollar index fell, Treasury yields also decreased. Instead of 75 basis points, traders are now more likely to price in a half-point Federal hike in December. They have also reduced the rate to below 5%, which is where they expect the peak rate to occur in 2019.
The CPI was expected to increase by 0.6% per month and the core by 0.5%, according to economists surveyed by Bloomberg.
Before the conclusion of their two-day policy meeting in mid-December, Fed officials will have both the next CPI report and the jobs report in hand.
However, exit polls indicate that social issues were a more significant factor than pre-election polling had indicated in Tuesday’s midterm elections than inflation and the overall performance of the economy had suggested. As of Thursday morning, the results were ambiguous, but it seemed that Republicans would gain a slim majority in the House of Representatives.
The consumer demand and labor market have shown to be largely resilient, despite the Fed’s most aggressive tightening campaign since the 1980s, which has resulted in some cooling in both. However, the housing market has rapidly deteriorated due to rising mortgage rates.
Global economies are being impacted by inflation, which has prompted the most aggressive and coordinated tightening of monetary policy in 40 years and increased the likelihood of a global recession.
The cost of housing, which accounts for the majority of services and accounts for about a third of the CPI index overall, rose by 0.8% last month, the highest rate since 1990. The largest increase in hotel rates in more than a year served as the catalyst for the acceleration.
Although data from the private sector suggests that rents have stabilized or even decreased in a number of American cities, Labor Department data often lag behind real-time changes. In the next two to three months, according to Bloomberg Economics, the components related to housing will reach their peak before starting to decline.
The CPI decreased by 0.1% when food, energy, and shelter were excluded, which was the lowest reading since May 2020.
Food prices have slowed, and used car prices have fallen 2.4%. Gasoline prices rose by 4%. Meanwhile, medical care services as a whole experienced their biggest decline since 1971 as health insurance costs fell by a record-breaking 4%.
Policymakers, traders, and the general public all pay close attention to the CPI, even though the Fed bases its 2% inflation target on a different inflation indicator from the Commerce Department called the personal consumption expenditures price index. The core index is typically regarded as a more accurate indicator of underlying inflation due to the volatility of food and energy prices.
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