Inflation eased in October in latest sign of cooling economy

Inflation eased further in October, offering a dose of encouragement as the Federal Reserve looks for enough progress to let up on its fight to tame consumer prices and slow the economy.

The latest report doesn’t seal the deal; over the past two years, glowing inflation data has sometimes been quickly followed by a spike in consumer prices. But a fresh snapshot from the Bureau of Labor Statistics on Tuesday showed telltale signs of progress–and a kind of assurance that has been hard to come by since the pandemic.

“It’s not signaling ‘out of the woods,'” said Jason Furman, a Harvard economist and former adviser to President Barack Obama. “But there was no new cause to panic here. In fact, there was some reason to calm down.”

Prices rose 3.2 percent over the year ending in October. That’s down from the 3.7 percent annual figure notched in September and August, but still above the 2 percent considered to be the normal rate. Compared with the prior month, prices in October were flat. The last time that happened was July 2022.

Perhaps the most telling detail was an inflation measure that strips out volatile categories such as food and energy to give policymakers a finer sense of where prices are embedding in the economy. That figure, known as “core inflation,” rose 4 percent over the prior year, the smallest 12-month change since September 2021.

Put together, overall inflation looks much better than in 2022, when prices soared to 40-year highs and threatened the entire economy. But even now, prices for groceries, health care, car insurance, rent and beyond are higher than before the pandemic started, weighing on peoples’ budgets and dragging down their perceptions of an otherwise strong economy.

Housing costs, namely rent, continue to be the largest contributor to overall inflation. Rent costs rose 0.5 percent in October over September, the same rate as it has been since the summer. Policymakers are generally optimistic that rent costs will ease as roughly 1 million multifamily rental units come online later this year and next. Already costs for new leases have cooled off.

But it will take time for those differences to be reflected in official data. And some housing experts wonder how much rent will meaningfully stabilize when so many newly constructed homes skew toward the higher end of the market.

Food costs rose 0.3 percent in October, after rising 0.2 percent in each of the last three months. Car insurance and medical care were also up.

But slices of the economy are seeing prices consistently cool. The gasoline index fell a whopping 5 percent in October, after dropping 2.1 percent in September. The index for used cars and trucks also fell 0.8 percent in October, after falling 2.5 percent in September.

Through it all, the Fed is pushing to root out remaining sources of inflation that haven’t responded to its aggressive moves. The central bank has pushed its baseline interest rate to between 5.25 and 5.5 percent, the highest level in 22 years, in the hope of controlling price increases.

Stocks cheered the inflation report, flashing green at Tuesday’s open. The Dow Jones Industrial Average popped 367.58 points, or 1.07 percent. The S&P 500 index rose 1.38 percent and the Nasdaq 1.74 percent.

Tuesday’s data from the consumer price index won’t overhaul the Fed’s plans moving forward. Officials have long said they need months of information–on prices, jobs, wages, spending and more–to understand where the economy is headed.

Yet over the past few months, officials have held off on raising rates to gauge whether their policies are working. October’s strong jobs report, combined with the latest inflation data, is likely to keep the Fed from announcing another rate hike when it convenes for its final meeting of the year in December.

In a speech last week, Fed Chair Jerome H. Powell said the central bank wouldn’t hesitate to raise rates again if need be. In the meantime, officials will “move carefully” so they can balance “both the risk of being misled by a few good months of data and the risk of overtightening.”

“We know that ongoing progress toward our 2 percent goal is not assured,” Powell said. “Inflation has given us a few head-fakes.”

More broadly, though, the economy continues to shine. The economy grew like gangbusters between July and September. The labor market is slowing down but still clocked a 34th straight month of gains in October. Plus, the recession that seemed practically guaranteed one year ago has largely faded from economists’ forecasts.

In an analyst report last week, Goldman Sachs kept the odds of a recession over the next 12 months at just 15 percent, thanks to real disposable income growth, an expected boost in manufacturing and the Fed’s ability, so far, to bring inflation down gradually without triggering a major downturn.

Still, while most Americans are financially better off than they were before the pandemic, many are still sour on the economy. And inflation is a major reason.

The frustration poses a huge political challenge to the White House, with just 30 percent of voters approving of President Biden’s handling of the economy. That’s the lowest reading since he took office, according to a Washington Post-ABC News poll.

Yet economists puzzle over why people can feel so down but continue to spend big on vacations, concert tickets and dining out. They’re expected to keep that momentum up through the holidays, keeping the economy churning into 2024.

At Weber’s Cider Mill Farm in Parkville, Maryland, heavy rain caused a bit less foot traffic this fall. But beyond that, shoppers haven’t stopped showing up, said Chief Operating Officer Stephanie Carstetter.

Supply chain problems have also improved greatly since 2022, when the farm’s suppliers struggled to keep glass jars in stock, for example. But now, with enough planning ahead, Carstetter can depend on having enough of the basics–such as jars and plastic packaging–to keep the business running smoothly.

The market and cider mill tend to be busiest from mid-to-late October, with kids and their families. But Carstetter said that even longtime, older shoppers who may have less wiggle room in their budgets have stayed loyal, too.

“They’re adjusting just like the rest of us,” she said.