Inflation eased in October and price increases showed encouraging signs of slowing under the surface, according to fresh data released on Tuesday. The report provided the Federal Reserve with renewed evidence that its battle against rapid inflation is working — and likely reduced the need for further rate increases.
The overall Consumer Price Index slowed to 3.2 percent last month on a year-over-year basis, lower than the 3.7 percent reading in September and the coolest since July. That deceleration owed partly to more moderate energy prices.
Even with volatile fuel and food prices stripped out, a closely watched “core” price measure climbed 4 percent in the year through October, slower than the previous reading and weaker than what economists had expected.
Inflation has come down meaningfully over the past year after peaking at just above 9 percent on an overall basis in the summer of 2022. Fed officials are trying to wrestle price increases back to roughly the 2 percent pace that was normal before the pandemic by raising interest rates, which they hope will slow consumer and business demand.
While price increases have cooled considerably over the past year, the downward drift had stalled in the months leading up to Tuesday’s report.
Price increases had eased in part because supply chain problems that had pushed up the costs of many goods reversed, allowing prices for items like bicycles and bed frames to stop rising so quickly or even decline. But housing and other service cost increases, which are more closely tied to the strength of the overall economy, had begun to prove more stubborn.
The fresh data showed that progress has resumed on those critical fronts. A closely watched measure of housing costs moderated after unexpectedly ticking up in September. A measure of inflation in other services — which encompasses everything from manicures to health care — also came down notably, to the slowest pace since late 2021 based on Bloomberg calculations.
Altogether, the data provided clear signs that inflation is headed in the right direction — an optimistic development for central bankers as they try to cool the economy just enough to bring down price increases without curbing its momentum so much that they spur a painful recession.
“It does suggest that inflation is continuing to slow down,” said Gennadiy Goldberg, a rates strategist at TD Securities, noting that while it was just one report, it was an encouraging one. “It is being driven by multiple things, not just one quirk.”
Fed officials are watching inflation figures closely as they try to determine their next steps. Policymakers have raised interest rates to a range of 5.25 to 5.5 percent, up from near zero as recently as March 2022.
They are now debating whether a final quarter-point rate move is necessary — and Tuesday’s report made many investors and economists speculate that a final increase is unlikely.
Stocks rose sharply following the fresh numbers, with the S&P 500 up more than 1 percent in the hours after the report was released. The cooler inflation numbers have raised hopes among investors that the Fed will keep interest rates steady: The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell markedly after the release.
“There could be bumpiness 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 rates further.”
Officials have been clear that they expect to leave interest rates at elevated levels even once they stop raising them, hoping to keep steady downward pressure on consumer and business demand by making it more expensive to borrow money.
And despite progress on taming inflation, central bankers may be hesitant to declare victory.
For one thing, they are not entirely out of the woods. Consumer and investor inflation expectations could become a point of concern for Fed officials if they continue to jump higher, for instance. A five-year-ahead measure produced by the University of Michigan has nudged higher, as have some market-based gauges. Policymakers have struck a sanguine tone about those changes so far.
Officials also tend to avoid clinging to one or two good numbers, worried that the gains could reverse.
“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” Jerome H. Powell, the Fed chair, said last week.
But many economists expect inflation to come down further in 2024. Goldman Sachs analysts predicted in a research note this week that there will be “further disinflation in the pipeline” coming from car, rental and labor markets.
For now, Mr. Goldberg said that policymakers were likely to pivot their attention toward economic growth, watching for signs that it is cooling to a sustainable pace.
Assuming demand weakens as expected, it should prod consumers to become or remain price sensitive — forcing retailers and service providers to either charge less or risk scaring away shoppers.
For some goods providers, that shift is already obvious. Rachel Glaser, the chief financial officer at the online crafts marketplace Etsy, said during a recent presentation that the platform had traditionally competed by offering unique products, rather than lower prices. But as consumers prove increasingly choosy, that is changing.
“We haven’t really competed or tried to compete on price,” she said during a September presentation. “But in this environment, we’ve started to lean a little bit into discounting.”