Inflation slowed in October, gauge closely watched by the Fed

A measure of inflation that is closely watched by the Federal Reserve declined but remained at a high level in October, likely reinforcing the Fed’s intention to continue raising interest rates to cool the economy and slow down price acceleration.

Thursday’s report from the Commerce Department showed prices rose 6% in October from a year earlier. The increase in personal consumption expenditure was the weakest since November 2021, and was down from a rate of 6.3% in September. Excluding volatile food and energy prices, so-called core inflation over the past 12 months was 5%, down from September’s 5.2%.

The report also showed consumers spent more in October, even after adjusting for inflation, a sign of their continued willingness to keep spending in the face of high prices. Spending rose 0.8% from September to October, or 0.5% after factoring in price increases. At the same time, after-tax income, adjusted for inflation, rose 0.4%.

However, many Americans are dipping into their savings to keep up with rising prices. The savings rate in October fell to 2.3%, its lowest level since 2005.

“Consumer spending held up in October, but the outlook for holiday spending is risky with the savings rate nearing a record high,” Comerica Bank chief economist Bill Adams said in a note. of research.

Responding to the worst episode of inflation since the early 1980s, the Fed raised its benchmark rate six times since March, and its last four increases have each been three-quarter points. The central bank hopes to organize the difficult task of bringing inflation back to its annual target of 2% without causing a recession in the process.

In recent months, inflation has come down from the four-decade highs reached earlier in the year. And most economists expect aggressive Fed tightening to further slow prices.

“We expect to see a lot more good inflation news in the coming months,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a research note.

Potential slowdown in Fed hikes

On Wednesday, Fed Chairman Jerome Powell said in a speech that the central bank could slow rate hikes to a half-point increase at its next meeting in two weeks – a message that sent cheers through financial markets. Yet at the same time, Powell made it clear that policymakers intend to keep their policy rate – which affects many consumer and business loans – high for an extended period.

The Fed’s series of aggressive rate hikes has made borrowing costs significantly more expensive across the economy. The housing market, in particular, was hammered by a doubling of mortgage rates a year ago: sales of previously occupied homes have fallen for nine straight months. Many economists expect the United States to slide into a recession next year as the effects of these more expensive lending rates take hold.

Signs of a resilient economy

Yet, in the meantime, the global economy is showing signs of surprising sustainability. On Wednesday, the government said the economy had seen solid growth 2.9% annual rate from July to September. The labor market, the most important barometer of economic health, remains robust. Employers have added a healthy average of 407,000 jobs per month so far this year, and unemployment remains near a half-century low.

The Fed is believed to be watching the inflation gauge that was released on Thursday, called the Personal Consumption Expenditures Price Index, even more closely than it does the government’s better-known consumer price index. . The government has indicated that the CPI rose 7.7% in October from 12 months earlier, down from June’s 9.1% year-over-year increase, which had been the biggest such jump in four decades.

The PCE index tends to show a lower level of inflation than the CPI. This is partly explained by the fact that rents, which have soared, weigh twice as much in the CPI as in the PCE.

The PCE price index also seeks to account for changes in the way people buy when inflation jumps. As a result, it can capture, for example, when consumers switch from expensive national brands to less expensive private labels.

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