Upbeat inflation report reduces pressure on Fed to raise interest rates

Inflation eased in October and price increases showed encouraging signs of slowing beneath the surface, according to the European Central Bank New data released on Tuesday. The report provided the Federal Reserve with renewed evidence that its fight against rapid inflation is working — and is likely to reduce the need to raise interest rates.

The overall consumer price index slowed to 3.2 percent last month on an annual basis, lower than the 3.7 percent reading in September and the coldest since July. This slowdown is due in part to more moderate energy prices.

Even excluding volatile fuel and food prices, the closely watched “core” price measure rose 4 percent year-on-year through October, slower than the previous reading and weaker than economists had expected.

Inflation has fallen significantly over the past year after peaking at just over 9 percent on an aggregate basis in the summer of 2022. Fed officials are trying to wrestle rate increases back to the roughly 2 percent pace that was normal before the pandemic by Raise interest rates. interest rates, which they hope will slow consumer and business demand.

While price increases have slowed significantly over the past year, the downward trend stalled in the months leading up to Tuesday’s report.

Price increases have eased in part due to a reversal of supply chain problems that have pushed up the costs of many goods, allowing prices for items such as bicycles and bed frames to stop rising so quickly or even fall. But increases in the costs of housing and other services, which are more closely linked to overall economic strength, are beginning to prove more stubborn.

New data showed that progress has resumed on those crucial fronts. Monitor closely Measuring housing costs Moderate after rising unexpectedly in September. A measure of inflation in other services — which includes everything from manicures to health care — also fell significantly to the slowest pace since late 2021 based on Bloomberg calculations.

Overall, the data provided clear signs that inflation is headed in the right direction – an optimistic development for central bankers as they try to calm the economy enough to moderate price increases without curbing its momentum to the point of leading to a painful recession.

“It indicates that inflation is continuing to slow,” said Gennady Goldberg, price strategist at TD Securities, noting that although it was just one report, it was encouraging. “It’s driven by multiple things, not just one feature.”

Fed officials are watching inflation numbers closely as they try to determine their next steps. Policymakers have raised interest rates to a range of 5.25 to 5.5%, up from almost zero in March 2022.

They are now debating whether it is necessary to raise the final interest rate by a quarter of a percentage point — and Tuesday’s report has many investors and economists predicting that an eventual increase is unlikely.

Stocks rose sharply after the new numbers, and the S&P 500 closed up nearly 2 percent. The cool inflation numbers have raised hopes among investors that the Federal Reserve will keep interest rates steady. The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell significantly after the release.

“There may be some hiccups along the way, but I’m really encouraged by the reading,” said Kathy Bostiancic, chief economist at Nationwide. “It reduces the pressure on policymakers to raise interest rates further.”

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

Despite progress in taming inflation, central bankers may be reluctant to declare victory.

For one thing, they’re not completely out of the woods. For example, inflation expectations for consumers and investors could become a point of concern for Fed officials if they continue to jump higher. The Next Five-Year Barometer released by the University of Michigan Pay higheras some did Market based Standards. Policymakers have been optimistic about these changes so far.

Officials also tend to avoid clinging to one or two good numbers, fearing that gains might be reversed.

“We know that continued progress toward our 2% target is not guaranteed: Inflation has given us some fudge,” Fed Chairman Jerome Powell said last week.

But many economists expect inflation to decline further in 2024. Goldman Sachs analysts predicted in a research note this week that there will be “further deceleration of inflation ahead” coming from the auto, rental and labor markets.

For now, Goldberg said, policymakers are likely to focus their attention toward economic growth, watching for signs that it is cooling to a sustainable pace.

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

For some commodity providers, this shift is already evident. The platform has traditionally competed by offering unique products, rather than low prices, Rachel Glaser, chief financial officer at online craft marketplace Etsy, said during a recent presentation. But as consumers become more selective, this is starting to change.

“We did not compete or try to compete on price,” she said during her presentation in September. “But in this environment, we’re starting to lean a little bit toward discounts.”