US inflation slows sharply in October, core pressures ease to 2-year low

US consumer prices were unchanged in October amid lower gasoline prices, and underlying inflation showed signs of slowing, supporting views that the Federal Reserve was probably done raising interest rates.
 

The unchanged reading in the consumer price index reported by the Labor Department’s Bureau of Labor Statistics (BLS) on Tuesday followed a 0.4 per cent rise in September.
 

In the 12 months through October, the CPI climbed 3.2 per cent after rising 3.7 per cent in September.
 

The softer-than-expected inflation readings reported pushed US Treasury yields lower and ignited a rally on the stock market.

“The Fed always wants to see more progress but it is looking like the inflation battle has rounded the corner,” said Christopher Rupkey, chief economist at FWDBONDS.

 

Economists polled by Reuters had forecast the CPI gaining 0.1 per cent on the month and increasing 3.3 per cent on a year-on-year basis.
 

Though year-on-year consumer prices have come down from a peak of 9.1 per cent in June 2022, the disinflationary trend has stalled somewhat against the backdrop of a strong economy that is being powered by a relatively tight labor market. Inflation is running above the Fed’s 2 per cent target. Financial markets and most economists believe that the US central bank's monetary policy tightening campaign is over, a narrative that Fed Chair Jerome Powell and other policymakers have pushed back against. Powell said last week that “if it becomes appropriate to tighten policy further, we will not hesitate to do so.”
 

Since March 2022, the Fed has hiked its policy rate by 525 basis points to the current 5.25 per cent-5.50 per cent band.
 

Excluding the volatile food and energy components, the CPI increased 0.2 per cent amid higher costs for rental housing. The so-called core CPI had risen by 0.3 per cent for two months.
 

With the October release, the BLS implemented changes to the methodology it uses to calculate health insurance prices, which boosted costs.
 

The old method was based on an annual calculation using aggregated health insurance premium and benefit data. There were concerns about the volatility in the annual data and the lag involved in incorporating the health insurance financial data.
 

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

The core CPI advanced 4.0 per cent on a year-on-year basis in October after increasing 4.1 per cent in September.