Washington – The Federal Reserve’s preferred measure of inflation cooled last month, the latest sign that price pressures are easing amid high interest rates and moderating economic growth.
Thursday’s report from the Commerce Department said prices were unchanged from September to October, down from a 0.4% increase the previous month. Compared with a year ago, consumer prices rose 3% in October, down from the 3.4% annual rate in September. That was the lowest year-over-year inflation rate in more than two and a half years.
Excluding volatile food and energy costs, increases in so-called core prices also slowed. They rose just 0.2% from September to October, compared to a 0.3% increase the previous month. Core prices rose 3.5% in October from a year earlier, down from the 3.7% year-on-year increase in September. Economists closely monitor underlying prices, which are believed to provide a good sign of the likely future path of inflation.
With inflation slowing, the Federal Reserve is expected to leave its key benchmark rate unchanged at its next meeting in two weeks. The latest figures also suggest that inflation will not reach the levels projected by the Federal Reserve itself for the last three months of 2023.
In September, Federal Reserve officials had forecast that inflation would average 3.3% in the October-December quarter. Prices are now on track to rise less than that, raising the likelihood that Federal Reserve officials will see no need to raise interest rates further.
“These data should encourage them,” Vincent Reinhart, chief economist at Dreyfus & Mellon and former Federal Reserve economist, said of central bank policymakers. “It is a good downward trend in core inflation. Under the hood, there is a slowdown that suggests they are making progress.”
Over the past six months, core inflation has risen at an annual rate of just 2.5%, not much above the Federal Reserve’s 2% target, and well below that of the previous year, when it was 5.1%.
A big drop in gasoline prices helped curb inflation last month. From September to October, the price of gas fell 4.9%. Prices at the pump have fallen further this month, to a national average of $3.25 a gallon on Thursday, according to AAA.
However, grocery prices rose 0.2% last month and were 2.3% above their average costs 12 months earlier. Those price increases, while smaller than last year, are still faster than they used to be before the pandemic.
Some individual grocery items rose sharply last month: Beef rose 1.2% from September to October. Milk and processed fruits and vegetables rose 1%. Overall food prices have risen 23% from their pre-pandemic level.
Still, Americans increased their spending last month, albeit at a modest pace. Consumer spending rose 0.2% in October, the report showed, a smaller increase than some big increases in the spring and summer.
But a moderate pace of spending, slowed by high borrowing costs, should cool the economy and help ease inflation further. On Wednesday, the government reported that American consumers spent enough to help boost the economy at a rapid 5.2% annual pace from July to September. However, growth is expected to slow to a pace of around 1.5% in the final three months of the year.
Spending fell sharply last month on large manufacturing goods (automobiles, furniture and appliances, for example) that are often bought on credit. The declines in spending on those items suggest that the Federal Reserve’s rate increases are discouraging buying in some areas. This trend could force companies to maintain price increases or even reduce them to support sales.
Americans overall appear to be increasingly price-sensitive in their purchases, which could also limit companies’ ability to raise prices, according to the Federal Reserve’s beige book, released Wednesday. The Beige Book is a collection of anecdotes, mostly from companies, compiled by the 12 regional Federal Reserve banks.
Since March 2022, the Federal Reserve has raised its key rate 11 times from near zero to about 5.4% in its attempt to curb inflation. Most economists believe their next step will be to cut rates, with the first cut likely coming in late spring.
On Tuesday, Christopher Waller, a key Federal Reserve official, suggested that a spring rate cut is possible if inflation continues to decline. Waller struck the most optimistic tone of any Fed official since the central bank launched its streak of rate hikes, noting that the rate hikes are likely over.
According to the Federal Reserve’s preferred gauge released Thursday, inflation peaked at 7.1% in June 2022. The central bank’s rate hikes have raised the costs of mortgages, auto loans and other forms of consumer indebtedness as well as commercial loans. The Federal Reserve’s goal in restricting credit has been to curb borrowing and spending and curb price increases.
Inflation is also cooling in Europe, where high interest rates have put pressure on the economy and slowed growth. Inflation in the 20 countries that use the euro fell to 2.4% in November from a year earlier, down from 2.9% in October.
Even as inflation has cooled, overall prices remain much higher than before the pandemic struck in February 2020, leaving many Americans with a bleak outlook on the economy. Consumer prices remain about 19% higher than before the pandemic struck. Most Americans’ wages have risen a little more than that. But inflation-adjusted wages have not risen as quickly as before the pandemic.
The U.S. inflation gauge released Thursday, called the personal consumption expenditures price index, is separate from the government’s better-known consumer price index. The government reported earlier this month that the CPI rose 3.2% in October from a year earlier.
The Federal Reserve prefers the PCE index in part because it takes into account changes in the way people shop when inflation rises (when, for example, consumers abandon expensive national brands in favor of cheaper commercial brands).