Slowing inflation in the US is boosting hopes that the Fed has ended interest rate hikes

WASHINGTON, Nov 14 (Reuters) – U.S. consumer prices were unchanged in October as Americans paid less for gas and annual growth in core inflation was the slowest in two years, underpinning views that the Federal Reserve is likely to have ended by raising interest rates.

Although rents continued to rise last month, the pace of increases has slowed considerably since September. Softer-than-expected inflation readings from the Labor Department’s Bureau of Labor Statistics (BLS) on Tuesday pushed U.S. Treasury yields lower and sent stock markets rallying.

Combined with data this month showing a cooling of job and wage growth in October, the data boosted expectations that the economy could avoid a dire recession.

“The Fed always wants to see more progress, but it looks like the inflation battle has turned the corner,” said Christopher Rupkey, chief economist at FVDBONDS. “With any luck, the economy will miss the recession and also get lower inflation.”

The unchanged CPI reading, the first in more than a year, followed a 0.4% rise in September.

Gasoline prices fell by 5.0%, offsetting continued growth in housing rental costs. Prices at the pump rose by 2.1% in September.

Food prices rose 0.3% after rising 0.2% in each of the previous three months. Food prices rose by 0.3%, boosted by higher costs of meat, fish and eggs. Cereals and bakery products also cost more, while fruit and vegetable prices remained unchanged.

In the 12 months to October, CPI rose 3.2% after a 3.7% rise in September.

Economists polled by Reuters had expected CPI to rise 0.1% month-on-month and 3.3% year-on-year.

Although year-on-year consumer price growth has fallen from a peak of 9.1% in June 2022, the disinflationary trend has stalled in recent months against the backdrop of a strong economy driven by a relatively tight labor market. Inflation continues to run above the Fed’s 2% target.

Most economists believe the U.S. central bank’s fastest tightening campaign since the 1980s is over, a narrative opposed by Fed Chairman Jerome Powell and other policymakers. Powell said last week that “if it is appropriate to further tighten policy, we will not hesitate to do so.”

Financial markets even expect a rate cut next May, according to CME Group’s FedWatch tool. From March 2022, the Fed increased the benchmark rate by 525 basis points to the current range of 5.25%-5.50%.

A woman carrying a shopping bag from Staud walks past people waiting in line for a pop-up shop in the SoHo district of New York, U.S., September 21, 2023. REUTERS/Bing Guan/File Photo Stick Licensing Rights

US Treasury prices rose and the yield on two-year interest rate-sensitive notes fell to a two-week low. The dollar fell against a basket of currencies. Stocks on Wall Street traded sharply higher.

DEFLATION OF GOODS CONTINUES

“Whether or not the economy can stay out of recession remains to be seen, but the stock market should continue to rise as people begin to accept that higher rates are off the table, which should push stock and bond prices higher, and yields to bonds lower. ” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

Excluding variable food and energy components, the CPI rose 0.2% due to higher housing rental costs. The so-called core CPI rose 0.3% for two consecutive months. Core CPI rose 4.0% year-on-year in October, the smallest increase since September 2021, following a 4.1% increase in September.

Equivalent owner rent, a measure of how much homeowners would pay for rent or earn from renting out their property, rose 0.4% after a 0.6% jump in September. With the rental vacancy rate rising to a more than two-year high in the third quarter and a strong housing stock, rents are expected to weigh on lower inflation next year.

The cost of hotel and motel rooms decreased by 2.5% in October. Americans continued to pay more for motor insurance, with prices rising 1.9%. Recreation, personal care and clothing also cost more. But consumers got relief from cheaper airline tickets, home furnishings and surgeries. New motor vehicles cost slightly less, as do communication services.

While used car and truck prices declined for the fifth consecutive month, the pace of decline slowed. Used cars and trucks were the main driver of goods deflation. Commodity prices fell 0.4% and 0.1% excluding food and energy, after falling 0.4% in September.

Health care costs increased by 0.3% due to higher prices for hospital services and prescription drugs. Doctor visits cost less. Health insurance costs rose 1.1% after months of declines as the BLS implemented changes to the methodology it uses to calculate health insurance prices, effective with the October release of the CPI.

The old method was based on an annual calculation using aggregated data on health insurance premiums and benefits. There were concerns about the volatility of annual data and the delay in including health insurance financial data.

The new method introduces smoothing of the health insurance index to reduce volatility and also includes semi-annual financial data, which will shorten the lag in the index by six months. The BLS will update retained earnings every six months using semiannual data and calculate a two-year moving average to smooth out changes in retained earnings.

Headline services inflation rose 0.3% after a 0.6% jump in September. Basic services rose 0.3% after rising 0.6% in the previous month. Despite last month’s encouraging readings, some economists warned that inflation still has a long way to go before returning to the Fed’s 2% target. They also noted that consumer inflation expectations rose in October.

“It’s still too early for the fight against inflation to be over,” said Will Compernall, macro strategist at FHN Financial in New York. “The biggest contributors to October’s disinflation, falling energy, commodity prices and slowing shelter inflation are all outer layers of the Fed’s ‘inflation arc’ that will not contribute to disinflation forever.”

Our Standards: Thomson Reuters Trust Principles.