Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the US economy and giving the Federal Reserve a possible green light to stop increased interest rates.
The consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% from a year ago despite being unchanged for the month, according to adjusted figures quarterly from the Department of Labor on Tuesdays. Economists polled by Dow Jones had been looking for readings of 0.1% and 3.3% respectively.
The core CPI was up 0.4% in September.
Excluding volatile food and energy prices, the core CPI increased by 0.2% and 4%, against expectations of 0.3% and 4.1%. The annual rate was the lowest in two years, down from 4.1% in September, although it was still well above the Federal Reserve’s 2% target. However, Fed officials have confirmed that they want to see a series of declines in basic readings, which have been since April.
The markets rallied after the news. The Dow Jones industrial average rose nearly 500 points as Treasury yields fell sharply. Traders also took any possible Fed rate hike almost completely off the table, according to CME Group data.
“The Fed is looking well to effectively end its tightening cycle while inflation continues to slow. Yields are down significantly as investors finally not sure that the Fed is inclined to throw in the towel,” said Bryce Doty, portfolio manager at Sit Fixed Income Advisors.
The flat reading on headline CPI came as energy prices fell 2.5% for the month, offsetting a 0.3% rise in the food index. This was the slowest monthly pace since July 2022.
Shelter costs, a key component of the index, rose 0.3% in October, half of September’s gain as the year-over-year increase slowed to 6.7%. Within the region, owner-equivalent rents, which measure how much property owners can rent, increased by 0.4%. A sub-sector that includes hotel and motel prices fell 2.9%.
“This is a game changer,” Paul McCulley, former chief economist at Pimco and now an associate professor at Georgetown University, said on CNBC’s “Squawk on the Street.” “We have a day of reasonable announcement, because the data clearly shows what we have been waiting for a long time, which is a crack in the shelter part.”
Chicago Fed President Austan Goolsbee called the report “slow but clear progress” on getting inflation back to healthy levels.
Car costs, which had been a major component of inflation during the spike in 2021-22, fell last month. New vehicle prices declined 0.1%, while used vehicle prices were down 0.8% and down 7.1% from a year ago.
Airline prices, another closely watched component, fell 0.9% and are off 13.2% annually. Motor vehicle insurance, however, saw a 1.9% increase and was up 19.2% from a year ago.
The report comes as markets are watching the Fed closely for next steps in a battle against persistent inflation that began in March 2022. The central bank eventually increased the key rate They borrowed 11 times for a total of 5.25 percentage points.
While markets strongly believe that the Fed is done tightening monetary policy, recent data has sent conflicting signals.
Nonfarm payrolls increased in October by just 150,000, indicating that the labor market is finally showing signs of responding to the Fed’s efforts to correct the supply-demand imbalance that has been a factor in inflation. to add.
Labor costs have been increasing at a much slower pace over the past year and a half as productivity has been rising this year.
Real average hourly earnings – adjusted for inflation – increased 0.2% month over month in October but were up just 0.8% from a year ago, according to a separate press release from the Labor Department.
Overall, gross domestic product increased in the third quarter, rising at an annual pace of 4.9%, although most economists expect the rate of growth to slow significantly.
However, other indicators show that consumer inflation expectations are still rising, a likely result of a spike in gasoline prices and uncertainty caused by the wars in Ukraine and Gaza.
Fed Chairman Jerome Powell last week added to market anxiety when he said he and his fellow policymakers remain unsure they have done enough to get inflation back to a certain level. annual rate of 2% and will not hesitate to increase rates if there is no more progress.” t did.
“Despite the tapering, the Fed is likely to continue talking dovish and will continue to warn investors not to be complacent about the Fed’s intention to bring inflation down to its long-term target of 2%,” said Jeffrey Roach, chief economist at LPL Financial.
Even if the Fed is hiked, there is more uncertainty about how long it will keep benchmark rates at their highest level in about 22 years.
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