US Inflation Eases to 7.7 Percent, Lowest Level Since January

People shop in a supermarket as rising inflation affects consumer prices in Los Angeles on June 13, 2022. Lucy Nicholson/Reuters

The U.S. annual inflation rate eased to 7.7 percent in October, down from 8.2 percent in September, according to new data from the Bureau of Labor Statistics (BLS).

The core inflation rate, which eliminates the volatile energy and food sectors, also dropped to 6.3 percent last month, down from 6.6 percent.

On a month-over-month basis, the consumer price index (CPI) rose by 0.4 percent, while the core CPI edged up by 0.3 percent.

The market consensus was an 8 percent reading in October. But some estimates had suggested a higher figure.

The Federal Reserve Bank of Cleveland’s Nowcast anticipated an 8.1 percent print, while Trading Economics also projected an 8.1 percent headline number.

Food prices continued to remain elevated in October, as the food index advanced to 10.9 percent year-over-year. Grocery store prices rose to 12.4 percent, while food away from home jumped to 8.6 percent.

There were also notable monthly increases in food items, including eggs (10.1 percent), lettuce (3.3 percent), flour (2 percent), white bread (1.7 percent), rice (1.2 percent), and coffee (1.2 percent).

The energy index came in at 17.6 percent, but prices surged by 1.8 percent month-over-month. Gasoline jumped by 19.3 percent from the same time a year ago and rose by 4 percent from September to October. Fuel oil spiked by 19.8 percent month-over-month in October, with the year-over-year rate topping 68 percent. Electricity costs also swelled by 14.1 percent from last year.

Shelter costs added to inflationary pressures, advancing at an annualized pace of 6.9 percent.

New vehicles and used cars and trucks rose by 8.4 percent and 2 percent, respectively, from the same time a year ago. Apparel climbed by 4.1 percent. Transportation and medical care services increased 15.2 percent and 5.4 percent year-over-year.

In addition, some other items recorded significant monthly gains, such as hotel accommodations (4.9 percent), postage (4.2 percent), motor oil (4.4 percent), and baby food (1.8 percent).

The financial markets roared after the lighter inflation report, with the Dow Jones Industrial Average soaring by more than 800 points. The S&P 500 rallied by about 100 points, while the Nasdaq Composite Index surged by roughly 400 points in pre-market trading.

Despite the drop in inflation, Peter Schiff, chief economist and global strategist at Euro Pacific Capital, doesn’t think the Federal Reserve is making progress on inflation.

“The #Fed is making no progress on reducing #inflation to 2%. Oct. #CPI rose .4%. That annualizes to an inflation rate of 5%, more than double the Fed’s goal. Negative real interest rates, soaring budget deficits, and a weakening dollar will soon drive YoY CPI gains to new highs,” he wrote on Twitter.

November and Beyond

Looking ahead to November, the Cleveland Fed Bank’s Nowcast expects the CPI to touch 8 percent and the core CPI to clock in at 6.6 percent.

Overall, economists are expecting a fifth consecutive 75-basis-point increase to the benchmark federal funds rate at the Federal Reserve’s December policy meeting. At the same time, according to the CME FedWatch Tool, more investors think the Federal Open Market Committee (FOMC) will approve a smaller half-point rate hike next month.

Richmond Fed Bank President Thomas Barkin recently told the Top of Virginia Chamber of Commerce at Shenandoah University that the central bank has learned from the 1970s, meaning that it can’t “let inflation fester and expectations rise.”

“We have been mandated by Congress to maintain stable prices, and we are doing what it takes to get inflation back to our 2 percent target,” Barkin said.

“After two-and-a-half years of instability, we’re all ready to get back to normal. But what’s normal? I’d say normal is not going back to where we were.”

The University of Michigan’s one- and five-year inflation expectations rose to 5.1 percent and 2.9 percent, respectively, in October.

“Uncertainty over inflation expectations remains elevated, indicating that inflation expectations are likely to remain unstable in the months ahead,” University of Michigan Surveys of Consumers Director Joanne Hsu said in a statement.

Although Fed Chair Jerome Powell told reporters during this month’s post-FOMC meeting press conference that the institution will likely push the fed funds rate to above the 4.5 percent and 4.7 percent range, traders are still discussing the possibility of a so-called Fed pivot sometime next year.

“We still have some ways to go,” Powell said. “And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

According to John Lynch, chief investment officer at Comerica Wealth Management, the U.S. central bank’s tightening crusade is “having its intended effect of slowing the economy, although not enough to end the tightening signal.”

“'Higher for longer’ becomes the mantra for a Fed determined to restore price stability, bringing inflation growth down to the central bank’s preferred 2.0% range,” Lynch wrote in a recent note (pdf).

But one market expert thinks the latest inflation print diminishes pressure on the Fed to deliver a three-quarter-point hike.

“Hard to believe that a 7.7% year over year inflation rate is reason for celebration, but the 0.3% monthly change in core CPI reduces pressure on the Fed to raise rates another 0.75% at their next meeting; so a relief rally in both stocks and bonds,” Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors, wrote in a note.

Speaking in an interview with Bloomberg TV, former Treasury Secretary Larry Summers suggested that the central bank may need to increase interest rates to above 6 percent to quash rampant price inflation. This would be the highest level in more than two decades.