US inflation slows sharply in October, core pressures ease to 2-year low
US consumer prices were unchanged in October due to lower gasoline prices, and underlying inflation showed signs of slowing, supporting the view that the Federal Reserve was likely done raising interest rates.
The unchanged reading of the Consumer Price Index reported Tuesday by the Labor Department’s Bureau of Labor Statistics (BLS) followed a 0.4 percent increase in September.
In the 12 months to October, the CPI rose 3.2 percent, after rising 3.7 percent in September.
Softer-than-expected inflation data pushed U.S. Treasury yields lower and sparked a stock market rally.
“The Fed always wants to see more progress, but it appears the inflation battle is just around the corner,” said Christopher Rupkey, chief economist at FWDBONDS.
Economists polled by Reuters had forecast the CPI to rise 0.1 percent this month and rise 3.3 percent on an annual basis.
While consumer prices have fallen year-on-year from a peak of 9.1 percent in June 2022, the disinflationary trend has stalled somewhat against the backdrop of a strong economy driven by a relatively tight labor market. Inflation is above the Fed’s 2 percent target. Financial markets and most economists believe the U.S. central bank’s tightening campaign is over, a narrative that Fed Chairman Jerome Powell and other policymakers have opposed. Powell said last week that “if it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current range of 5.25 percent to 5.50 percent.
Excluding volatile food and energy components, the CPI rose 0.2 percent due to higher rental housing costs. The so-called core CPI had risen by 0.3 percent for two months.
With the October release, the BLS made changes to the methodology it uses to calculate health insurance prices, driving up costs.
The old method was based on an annual calculation based on aggregated health insurance premium and benefit data. There were concerns about the volatility of annual data and delays in processing health insurance financial data.
The new method introduces a smoothing of the health insurance index to reduce volatility and also includes semi-annual financial data, which will shorten the index lag by six months. The BLS will update retained earnings every six months based on semi-annual data and will calculate a two-year moving average to smooth out changes in retained earnings.
The core CPI rose 4.0 percent year-on-year in October, after rising 4.1 percent in September.