An optimistic inflation report reduces pressure on the Fed to raise rates

Inflation eased in October and price increases showed encouraging signs of slowing, according to the underworld New data was released on Tuesday. The report provided the Federal Reserve with renewed evidence that its fight against rapid inflation is working – and likely reduced the need for further rate hikes.

The overall consumer price index slowed to an annualized 3.2 percent last month, down from 3.7 percent in September and the coolest since July. That slowdown was partly due to more moderate energy prices.

Even with volatile fuel and food prices eliminated, a closely watched “core” price measure rose 4 percent over the year through October, slower than the previous reading and weaker than what economists expected .

Inflation has fallen significantly over the past year, after peaking at just above 9 percent on an overall basis in the summer of 2022. By raising rates, Fed officials are trying to reduce price increases to the pace of about 2 percent that was normal before the pandemic. tariffs, which they hope will slow consumer and business demand.

Although price increases have cooled significantly over the past year, the downward movement had stalled in the months leading up to Tuesday’s report.

Price increases had slowed in part because supply chain problems that had driven up the costs of many goods were reversed, preventing prices for items like bicycles and bed frames from rising as quickly or even falling. But increases in housing and other service costs, which are more closely linked to the strength of the overall economy, began to prove more persistent.

The new data shows that progress has resumed on these crucial fronts. A closely watched one benchmark for housing costs moderate after an unexpected increase in September. A measure of inflation in other services — which includes everything from manicures to health care — also fell noticeably, to the slowest pace since late 2021, based on Bloomberg calculations.

Overall, the data provided clear signals that inflation is heading in the right direction – an optimistic development for central bankers who are trying to cool the economy just enough to bring down price increases without limiting their momentum so much that they cause a painful recession.

“It suggests that inflation continues to slow,” said Gennadiy Goldberg, rates strategist at TD Securities, noting that while it was just one report, it was encouraging. “It’s driven by multiple things, not just one quirk.”

Fed officials are keeping a close eye on inflation numbers as they try to determine their next steps. Policymakers have raised interest rates to 5.25 to 5.5 percent, up from near zero in March 2022.

They are now debating whether a final quarter-point rate hike is necessary — and Tuesday’s report led many investors and economists to speculate that a final hike is unlikely.

Stocks rose sharply after the new figures, with the S&P 500 up more than 1 percent in the hours after the report was released. The lower inflation figures have raised investor hopes that the Fed will keep interest rates stable: yields on two-year government bonds, which are sensitive to changes in interest rate expectations, fell significantly after the release.

“There may 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 interest rates further.”

Officials have made clear that they expect to leave interest rates at high levels even if they stop raising them, hoping to maintain steady downward pressure on consumer and business demand by making it more expensive to borrow money to borrow.

And despite progress in curbing inflation, central bankers may hesitate to declare victory.

For starters, they’re not completely out of the woods. Consumer and investor inflation expectations could become a concern for Fed officials if they continue to rise, for example. This is evident from a five-year measure from the University of Michigan pushed higherlike some market-oriented meters. Policymakers have so far struck an optimistic tone about these changes.

Officials also tend not to stick with one or two good numbers because they worry that profits could reverse.

“We know that continued progress toward our 2 percent goal is not assured: inflation has given us some head fakes,” Fed Chairman Jerome H. Powell said last week.

But many economists expect inflation to fall further in 2024. Analysts at Goldman Sachs predicted in a research note this week that there will be “further disinflation in the pipeline,” coming from the auto, rental and labor markets.

For now, Mr. Goldberg said policymakers will likely turn their attention to economic growth, waiting for signs that it is slowing to a sustainable pace.

Assuming demand weakens as expected, this should prompt consumers to become or remain price sensitive, forcing retailers and service providers to either charge less or risk scaring off shoppers.

This shift is already clear for some goods providers. Rachel Glaser, chief financial officer of online craft marketplace Etsy, said during a recent presentation that the platform traditionally competed by offering unique products, rather than lower prices. But now that consumers are proving to be increasingly picky, that is changing.

“We haven’t really competed or tried to compete on price,” she said during a presentation in September. “But in this environment we started to invest a little bit in discounts.”