New government data released Thursday indicates that inflation ticked slightly higher in October but remained on a broader cooling trajectory as price pressures continue moderating from 40-year highs reached earlier this year. The report provides further evidence that the rapid pace of price increases may be starting to steadily decelerate, supporting the Federal Reserve’s recent inclination to halt its aggressive interest rate hike campaign.
The Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose 0.2% last month and 3.5% over the past year. This matched consensus economist forecasts. The core PCE index strips out volatile food and energy costs to provide a clearer view underlying price trends.
While still well above the Fed’s 2% target, the annual increase was down from 5.3% in February. The incremental monthly gain showed prices climbing at a more restrained pace after an intense burst earlier this year.
“The Fed is on hold for now but their pivot to rate cuts is getting closer,” said Bill Adams, chief economist at Comerica Bank. “Inflation is clearly slowing.”
Markets are already betting policymakers won’t hike rates again this cycle, and may even start cutting in 2024 to bolster growth as price pressures continue easing. The latest data provides credibility to the idea that the Fed’s rapid rate hikes since March, which have raised its benchmark to a 15-year high, have begun achieving their intended effect of reining in demand and cooling the economy enough to tame inflation back toward manageable levels.
Still Cautious on Further Easing
However, Fed officials stressed that rates will still need to remain at restrictive levels for some time to ensure inflation continues descending toward the central bank’s 2% target.
New York Fed President John Williams said Thursday he expects inflation to keep drifting lower, finally hitting the Fed’s goal by 2025. But he emphasized rates will likely need to stay elevated until then to completely quell price pressures.
Other Fed policymakers also struck a cautious tone on prematurely ending rate hikes before inflation is convincingly on a path back towards the 2% goal. Many noted that while price increases may be peaking, inflation remains stubbornly high and consumer demand continues holding up more than feared despite rapid rate rises this year.
Moderating Labor Market Could Allow Rate Cuts
There were some early signs in Thursday’s data that the torrid job market may also finally be cooling slightly after persisting at unsustainable levels through much of the year.
The report showed continuing jobless claims climbed to 1.93 million in mid-November, their highest mark since November 2021. The number of Americans applying for ongoing unemployment benefits has risen by more than 80,000 since October.
While still historically low, the increase could provide Fed officials confidence that their rate hikes have begun not only slowing demand and price growth, but also easing excessively tight labor market conditions they have said contributed to rapid wage and inflation surges.
An easing job market that reduces wage pressures could give the Fed leeway next year to shift their priority toward sustaining growth and cut rates to spur a slowing economy, especially as other inflationary pressures subside.
Consumers Keeping Pace For Now
On the growth side, the report showed some signs of resilience among consumers even in the face of elevated inflation and rising borrowing costs.
Personal income and consumer spending both edged up 0.2% in October, indicating households are so far keeping pace with rising prices digging into their paychecks. Services like travel and healthcare saw particularly solid spending last month.
Surveys show consumers remain relatively upbeat thanks to still-ample savings and solid income growth. But many Fed officials have noted anecdotally that households appear to be pulling back spending more than aggregate data indicates so far. Any sharper-than-expected deceleration in consumer demand would give policymakers leeway to pivot toward supporting growth.
Eyes on Services Inflation
Some economists noted that while goods prices have cooled sharply from peaks last year amid improving supply issues, services costs remain stubbornly high for now as resilience in consumer demand combined with rising wage growth enables firms to pass higher labor expenses to customers.
“Inflation is moderating with goods prices leading the charge,” said economist Nancy Vanden Houten of Oxford Economics. But she said core services costs actually ticked up in October, bearing monitoring to ensure price stability as the economy shifts more toward services consumption over goods.
With strong income gains and accumulated savings still underpinning spending for now, officials emphasized rates may need to stay higher for longer to ensure the progress made on easing price pressures sticks.
“I expect it will be appropriate to maintain a restrictive stance for quite some me to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis,” said the New York Fed’s Williams on Thursday.