US inflation slows more than forecast, gives Fed downshift room

US inflation cooled in October by more than forecast, offering hope that the fastest price increases in decades are ebbing and giving Federal Reserve officials room to slow down their steep interest-rate hikes.

The consumer price index was up 7.7 per cent from a year earlier, the smallest annual advance since the start of the year and down from 8.2 per cent in September, according to a Labor Department report. Core prices, which exclude food and energy and are regarded as a better underlying indicator of inflation, advanced 6.3 per cent, pulling back from a 40-year high.

The core consumer price index increased 0.3 per cent from the prior month, while the overall CPI advanced 0.4 per cent. Both increases as well as the monthly rises were below the median economist estimates.

“I think the underlying elements of this report are actually good, they’re supportive, there’s some evidence that we’re moving from peak inflation down lower, Matthew Luzzetti, chief US economist at Deutsche Bank, said. “Where do we end up I think is the big question.”

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While the deceleration in core prices is welcome news, inflation remains much too high for comfort for Fed chairman Jerome Powell, who said earlier this month that officials need to see a consistent pattern of weaker monthly inflation, and also indicated interest rates will likely peak higher than policy makers previously envisioned.

Declines in the price gauges for medical care services and used vehicles restrained the core measure. Higher shelter costs contributed to more than half of the increase in overall CPI.

Treasury yields plunged while the S&P 500 soared at the open and the dollar index tumbled. Traders moved closer to pricing in a half-point Fed hike in December, rather than 75 basis points, and cut to below 5 percent where they see the peak rate coming next year.

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

Meanwhile, elevated inflation continues to weigh on American households and the broader economy. High prices have eaten away at wage gains and led many to either tighten their belts or rely on savings and credit cards to keep spending.

While the Fed has embarked on the most aggressive tightening campaign since the 1980s, the labour market and consumer demand, while cooling some, have proved to be largely resilient. The housing market, however, has rapidly deteriorated amid soaring mortgage rates.

Consumer price growth is expected to further moderate over the coming year, though some economists expect the path back to the Fed’s inflation goal to include both a recession and a rise in the unemployment rate.

Stripping out food, energy and shelter, the CPI dropped 0.1 per cent, the weakest reading since May 2020.

While the Fed bases its 2 per cent target on a separate inflation measure from the Commerce Department -- the personal consumption expenditures price index -- the CPI is closely watched by policy makers, traders and the public. Given the volatility of food and energy prices, the core index is generally considered a more reliable barometer of underlying inflation.

Excluding food and energy, the cost of goods decreased 0.4 per cent, the biggest decline since March. Services prices less energy increased 0.5 per cent.

Economists generally expect goods prices to continue to soften as a result of shifting consumer preferences, improving supply chains and lower commodity prices. However, services may keep upward pressure on wages and inflation for the foreseeable future.

A separate report Thursday highlighted how high inflation is depressing workers’ purchasing power. Real average hourly earnings decreased in October and were down 2.8 per cent from a year earlier. After adjusting for inflation, annual wages have fallen each month since April 2021. -- Bloomberg