US Inflation Falls to 7.7% from 8.2%. Whats ahead for the Fed and the US D
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- 24.03.2023
Despite continued strong economic growth, inflation remains persistently high, just above the Federal Reserve’s 2% target. Price pressures continue to be strong across broad goods and services, but the pace of price increases has eased.
Annual consumer prices rose 7.7% in October, down from a September reading of 8.2%. The core CPI rose 6.3% in October, a slightly slower rate of increase than economists expected. Despite the decrease, inflation remains near a four-decade high. Inflation is still above the Fed’s 2% target, but could slow down and lead to a pause in interest rate hikes.
The core CPI excluding volatile food and energy costs was up 6.3% in October, its biggest gain in over a year. The inflation rate for energy prices soared 130% over the past year, raising concerns about the country’s budget and government debt. But energy costs have eased in the past week, and gasoline prices have retreated from summer highs of more than $5 a gallon nationwide.
While some economists caution against premature optimism, a jump in equity prices after the inflation report was a welcome sign. Markets saw the good news as a sign the Federal Reserve would pause interest rate normalization, reducing the likelihood of a recession. They also saw the news as evidence that economic policies are producing their intended results.
The Fed is hoping higher borrowing costs will help curb spending, which is a key driver of inflation. But higher borrowing costs may hurt economic growth if they lead to higher bond yields, which could suppress investment.
The price pressures remain strong, but the Fed hopes that its aggressive actions will not push inflation above its 2% target. It has already raised short-term interest rates by 0.75 percentage points this year. It is considering taking a pause in December to assess the impact of its cumulative tightening on the economy. If it does take a pause, that could mean no more three-quarters of a percentage point rate hikes in December. However, if the Fed does continue to increase short-term interest rates, inflation may continue to rise.
A key indicator of inflationary pressures, rents, remained strong. The estimate of homeowners’ imputed rent increased more slowly in October than in September. The index is not based on home sales prices, but on leases negotiated once a year. Rents are expected to remain strong in the index for some time.
A sharp drop in medical-care prices was also a good sign. Health insurance premiums dropped 4 percent in October. Medical-care inflation eased as new information about health care insurance premiums was released. But medical-care prices were still sharply higher than a year ago.
Inflation also fell for clothing and apparel, but increased for motor vehicles and shelter. The core CPI excluding volatile food andenergy costs fell to 6.3% from 6.5% in September. The core CPI, which excludes volatile food and energy prices, is important for predicting future inflation trends.
The Fed said it would consider the inflation report when it makes its next interest-rate decision in December. The Fed expects inflation to slow and possibly pause in early 2023. Inflation is still above the Fed’s target, but it is not as high as earlier this year.