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A good inflation report for October makes it more likely that the Federal Reserve will not raise interest rates again this year. Consumer prices were unchanged, on average, in October versus September, and were 3.2% higher than a year ago. A 5.0% drop in gasoline counteracted the usual price increases. Excluding food and energy, prices rose a moderate 0.2% for the month, and 4.0% over the past 12 months, down from a 4.1% annual rate last month.
The price of groceries rose a moderate 0.3% in October and 2.1% over the last year. Restaurant prices were up 0.4% from the prior month, and a large 5.4% in the past 12 months. There was some good news for consumers: Used car prices continue to decline, and ahead of the holiday shopping season, toys are 3.9% cheaper than they were at this time last year. Of note to holiday travelers: Airfares have been declining along with the price of fuel, and lodging costs dropped in October.
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The largest single component of the index is shelter costs, which increased a moderate 0.3% after rising 0.6% in September. This slower trend is expected to continue. Price increases for car insurance remain strong and are up 19.2% over the past year.
Inflation pressures will stay roughly the same this fall, yet the headline number will jump in December. Headline numbers are calculated as the percentage change from a year ago, and December year-ago prices declined or rose only modestly. This will create a temporary spike in the headline CPI figure, with reported inflation likely to come in at about 4.0%. The headline number will drop in January and February, however.
Moderate inflation pressures should enable the Fed to stop hiking short-term interest rates. Concerns about the effect of higher interest rates on banks’ portfolios of government securities will be the main reason for the pause, but recent inflation reports will make the central bank’s decision easier. The Fed is likely to discount the pickup in inflation headline numbers this fall, as well. The Fed will see November’s price report before its meeting on Dec. 13.
The Fed is unlikely to actually cut rates this year, however. It remains concerned about persistent inflation in the services sector, which will likely keep it from reversing recent hikes unless a recession hits. The Fed would like to see wage increases start to soften in order to prevent a cycle of further price increases, in which businesses try to maintain their profit margins by passing higher wage costs along to customers.
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