US inflation slows more than forecast, gives Fed room to taper

US inflation slows more than forecast, gives Fed room to taper

(Bloomberg) — U.S. inflation fell more than forecast in October, offering hope that the fastest price increases in decades are easing and giving Federal Reserve officials room to slow their sharp rate hikes.

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The consumer price index rose 7.7 percent from a year earlier, the smallest annual gain since the start of the year and down from 8.2 percent in September, the Labor Department reported on Thursday. Core prices, which exclude food and energy and are seen as a better underlying measure of inflation, rose 6.3 percent, down from a 40-year high last month.

The core consumer price index rose 0.3% from the previous month, while the overall CPI rose 0.4%. Both the increases and the monthly increases were below economists’ average estimates.

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While the slowdown in core rates is welcome news, inflation remains too high for the Fed to be comfortable. Chairman Jerome Powell, who said earlier this month that officials should see a steady pattern of weaker monthly inflation, also indicated that interest rates would likely peak higher than policymakers had forecast.

Price cuts for medical care services and used vehicles capped the key measure. Higher housing costs contributed to more than half of the overall CPI increase.

Bond yields fell while US stock futures rose and the dollar index fell. Traders came close to pricing in a half-point Fed hike in December, instead of 75 basis points, and fell below 5% where they see the top rate coming next year.

Average estimates in a Bloomberg survey of economists called for a 0.6% monthly gain in the CPI and a 0.5% rise in the core.

Fed officials will have another CPI and jobs report before the end of their two-day policy meeting in mid-December.

Meanwhile, elevated inflation continues to weigh on American households and the broader economy. High prices have eaten into wage gains and led many to either tighten their belts or rely on savings and credit cards to keep spending.

Inflation and the broader performance of the economy played a role in Tuesday’s midterm elections, although exit polls showed social issues proved a bigger factor than pre-election polls had suggested. As of Thursday morning, the results were unclear, but it appeared that Republicans would win a narrow majority in the House of Representatives.

Fed campaign

While the Fed has embarked on its most aggressive tightening campaign since the 1980s, the labor market and consumer demand, while dampening some, have proven largely resilient. The housing market, however, has deteriorated rapidly amid rising mortgage rates.

Consumer price growth is expected to moderate further next year, although some economists expect a return to the Fed’s inflation target to include both a recession and a rise in the unemployment rate.

Inflation is affecting economies worldwide, prompting the world’s most aggressive and synchronized monetary policy tightening in 40 years and increasing the risks of a global recession.

The cost of housing — which is the largest component of services and makes up about a third of the total CPI — rose 0.8 percent last month, the largest rate since 1990. The acceleration was fueled by a larger rise in costs hotel stays in more than one year.

Although private-sector data shows rents stabilizing — or even declining — in a number of cities across the country, there’s a lag between real-time changes and when they’re reflected in the Labor Department’s data. Bloomberg Economics estimates that shelter-related components will peak in the next two to three months and then begin to slow.

Excluding food, energy and housing, the CPI fell 0.1%, the weakest reading since May 2020.

Monthly movers

  • Food rose 0.6%, the smallest gain this year

  • Apparel fell 0.7%, the biggest drop since April

  • Home furnishings fell 0.2%, more than in January 2021

  • Health insurance down 4%

  • Total medical care services fell 0.6%, more than in 1971

  • Used cars fell 2.4%, more than in March

While the Fed bases its 2% target on a separate measure of inflation from the Commerce Department — the personal consumption expenditures price index — the CPI is closely watched by policymakers, traders and the public. Given the volatility of food and energy prices, the core index is generally considered a more reliable barometer of underlying inflation.

Excluding food and energy, the cost of goods fell 0.4%, the biggest drop since March. Prices of services minus energy increased by 0.5%.

Economists generally expect commodity prices to continue to fall as a result of shifting consumer preferences, improving supply chains and lower commodity prices. However, services may maintain upward pressure on wages and inflation for the foreseeable future.

What are the companies saying…

  • “I don’t think prices will drop to pre-pandemic levels, but we’ve seen pricing ease.” – Dara Khosrowshahi, CEO of Uber Technologies Inc.

  • “We certainly will not try to raise prices during this period. But certainly, we’ve proven, over the last 12 months or so, that we’ve had price increases of almost 6% and we haven’t seen the loyalty and transactions go down.” – Howard Schultz, CEO of Starbucks Corp.

  • “Given the additional inflationary pressures we are experiencing, we are in the process of implementing an approximately 2.8% incremental increase in menu prices.” – Matthew Clarke, CFO of Cheesecake Factory Inc.

A separate report on Thursday highlighted how high inflation is eroding workers’ purchasing power. Real average hourly earnings fell in October, down 2.8% from a year earlier. After adjusting for inflation, annual salaries are reduced monthly from April 2021.

–With assistance from Augusta Saraiva, Chris Middleton and Liz Capo McCormick.

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