Inflation Showing Signs of Improvement

While still running high, inflation finally eased in October, giving the Fed some room to ease off its interest-rate pace.

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Inflation eased to 7.7% in October – still high, but an improvement over September’s 8.2% rate. This is the first sign of a long-expected improvement in monthly inflation reports that should bring the rate down to a little above 3% by the end of next year.

An easing of the rate of increase in non-food, non-energy prices suggests that the underlying growth rate most responsible for inflation’s momentum has peaked and may be on a slow, downward path. Medical care inflation eased significantly as new information about health care insurance premiums was included. Price increases for new cars moderated, while prices of used cars fell for the second month. Clothing prices declined for the second month, as well. The largest price category, rent, rose at a slower pace. (Rent increases are expected to remain strong in the index for a while because of the length of time it takes for leases to come up for renewal.) As a bonus, price increases for groceries eased as well, with their smallest rise in almost a year.

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Not all was rosy, though: Auto insurance rates are still rising strongly, in tandem with the cost of repairs. Restaurant prices are maintaining strong upward momentum and hotel rates jumped in October. Gasoline prices bumped up moderately.

The Federal Reserve will likely see this report as justification to dial back its next short-term interest rate hike to a 0.50-percentage point at its next policy meeting on Dec. 15, instead of the 0.75-percentage-point increases it had been making. The easing in broader underlying components of the inflation rate is what the Fed is looking for, and not just decreases in gasoline prices. However, there is still inflationary momentum in the economy that the Fed is worried about. Wage increases are slowing, but are still high. These could generate further rounds of price increases as businesses try to maintain their profit margins.

Consumer Price Index historical tables

David Payne
Staff Economist, The Kiplinger Letter
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.