Inflation Continues to Cool as Energy Prices Fall

A key inflation measure that is closely watched by the Federal Reserve came in below estimates at 3% yearly, down from 3.4% in September, the Bureau of Economic Analysis said on Thursday.

The core personal consumption price expenditures index, leaving out often volatile food and energy costs, fell to 3.5% annualized in October, down from 3.7% a month ago.

The overall index was slightly better while the core was in line with estimates. Both are yet another indication that inflation has moderated from its pace of last year when consumer inflation was running at a 9.1% annual rate.

A 4.8% drop in the price of energy from a year ago offset an increase of 0.2% in the goods category and 4.4% for services. Food prices increased by 2.4 percent.

“After fears of “sticky” and “persistent” inflation, the month to month slowing in the core pce readings is encouraging. Core pce has risen by 0.3% or less for 8 consecutive months. On a 3 month annualized basis, core pce is near the Fed’s 2% target,” Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, said on social media.

“This report hit the trifecta,” said Navy Federal Credit Union corporate economist Robert Frick. “The gradual weakening of real disposable consumer income reversed, a key inflation measure dropped and real spending stayed positive. This is particularly critical now given the economy has started to slow from the torrid 5.2% GDP annualized pace in the third quarter. We’ll need good things such as these to help skirt recession in the first half of next year.”

One key component of inflation, housing costs, are also showing some deceleration. Online rental site Zumper said that rents barely rose in November, with one-bedroom apartments seeing a half-percent increase in rents. That is the lowest since December 2020 while half the cities on Zumper’s Top 100 list were showing year-over-year rent declines.

On Wednesday, the Federal Reserve released its “beige book” summary of economic conditions around the country showing a slowdown in activity. Of the 12 regional Fed districts, four reported the economy still growing modestly while the remainder either said they were seeing a slowdown or flat activity.

While travel and tourism was holding up, manufacturing had weakened and retail activity was mixed. Labor market pressures had eased in general. The Fed meets in a couple of weeks and the report is consistent with expectations the central bank will hold rates steady. Some economists predict the Fed will start cutting rates by the middle of next year, if not earlier should the economy worsen.

“The Federal Reserve’s latest beige book documents a downshifting in growth, with consumption and inflation slowing and the labor market coming into better balance,” said Curt Long, chief economist at the National Association of Federal Credit Unions. “These conditions should allow for a rate cut in the first half of 2024.”

Markets have been cheering the idea that the Fed may be able to pull off the “soft landing” where economic conditions slow enough to bring down inflation but not so much that a recession is triggered. Stocks are up about 8.5% in November and as the month comes to an end, Dow Jones Industrial Average futures were up more than 200 points in pre-market trading.

Separately, the Labor Department reported on Thursday that the number of people filing first-time claims for unemployment benefits rose by 7,000 last week to 218,000. The four-week moving average was 220,000, a decrease of 500 from the prior period’s revised number.