U.S. Inflation Finally Offers Relief, But There’s Still A Long Way To Go

(Bloomberg) -- A cooling in US consumer prices offered cheer to households, investors and Federal Reserve officials, but there’s still a long way before high inflation becomes history. 

At 7.7%, annual inflation in October was the slowest since January -- before the start of Russia’s war in Ukraine that triggered a worldwide surge in commodities and pump prices. Even more importantly for the Fed, a closely watched measure that excludes food and energy decelerated by more than economists anticipated.

With slowdowns across categories including food, apparel and used cars, the report suggests that the fastest price increases in decades may finally be starting to ebb in the world’s largest economy. And it probably gives the US central bank enough assurance to moderate its aggressive interest-rate hikes if the trend is sustained.

US stocks, battered this week by a massive rout in crypto-related shares, surged after the report. Treasury yields plummeted and the Bloomberg dollar index tumbled. Traders moved to price a half-point Fed hike in December as a near certainty, and cut to below 5% where they see borrowing costs peaking next year.

Still, the figures are only an early step on a long path to tame inflation that’s been entrenched for months and remains well above pre-pandemic levels.

“Finally, a softer inflation report,” said Tiffany Wilding, North American economist at Pacific Investment Management Co. “While we still expect inflation to re-accelerate somewhat over the next few months, this report also increases our confidence in our 4.5%-5% expected range where the Fed pauses.”

Fed officials who spoke after the release echoed the overall sense of relief. 

San Francisco Fed President Mary Daly said the report was “good news.” Dallas Fed President Lorie Logan said it “may soon be appropriate to slow the pace of rate increases,” though such a move “should not be taken to represent easier policy.”

Chair Jerome Powell said earlier this month that officials need to see a consistent pattern of weaker monthly inflation and that it’s premature to consider pausing rate hikes.

Fed policymakers will have both another CPI report and jobs report in hand before the end of their two-day policy meeting in mid-December.

What Bloomberg Economics Says...

“The market may rally in response to the print, but inflation measures that strip out the outliers and methodological quirks are still running at a pace more than double the Fed’s 2% target, which means policy makers are still far from pausing.”

-- Anna Wong, economist

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Elevated inflation continues to weigh on American households. High prices have eaten at wage gains and led many to either tighten their belts or rely on savings and credit cards to keep spending.

“It’s just off its peak and it’s just one month worth of data,” said Sal Guatieri, a senior economist at BMO Capital Markets. “You can never have too much confidence in just one month of reports.”

A quirk also dragged down the October price figures. Health insurance, which had consistently been contributing to US price pressures, dropped by a record 4% from the prior month, due to an annual change in source data.

Inflation and the broader performance of the economy played a role in Tuesday’s midterm elections and have weighed on President Joe Biden’s approval ratings, though exit polls suggest social issues proved a bigger factor than pre-election polling had suggested.

Rent and brisk demand for services may keep inflation persisting at a high level.

While other data show asking prices for rents are cooling, or even falling, that will take time to be reflected in the government figures. In October, shelter, which makes up about one-third of the overall basket of consumer prices, contributed more than half of the overall monthly increase.

“The continued tightness in the labor market as well as the shift of consumer spending away from goods and toward services implies this area of inflation is likely to stay elevated for some time,” said Blerina Uruci, US economist at T. Rowe Price Associates.

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