Soft Landing Ahead? Inflation Eases in October

Neil Hall

Prices are still rising in the U.S., but they rose less in October than economists had expected, boosting hopes that the Federal Reserve’s campaign against inflation is starting to show results – and that the central bank can achieve the “soft landing” for the economy it’s targeting.

The Consumer Price Index rose 0.4% in October on a monthly basis and 7.7% on an annual basis, the Bureau of Labor Statistics said Thursday. Analysts had expected to see an annual inflation rate closer to 8%, and the lower number – the lowest since January – came as a pleasant surprise.

The core price index, which ignores volatile food and energy prices, rose 0.3% on a monthly basis and 6.3% on an annual basis. The monthly increase was half the size of that in September, and was driven largely by increases in the cost of housing, with the shelter index rising by 6.9% over the last 12 months.

“This inflation report was a nice surprise,” Edward Moya, an analyst at the investment firm Oanda, said in a research note. “Inflation has been very slow to come down, but this report gives up hope that this deceleration with pricing pressures might bring back hopes of a soft landing.”

What about the Fed? The stock market rallied powerfully after the inflation numbers came out, as investors weighed the odds that the report would allow the Fed to begin easing up in its war on inflation. Many analysts think the report makes it more likely that the central bank will increase rates by 50 basis points at its next meeting in December – a substantial increase, but smaller than the 75-point increases approved at the last four meetings.

“Today’s CPI report shows inflation is moving in the right direction,” said Eric Merlis, managing director at Citizens Bank. “The report provides ammunition for the Fed to begin pricing in sub-75-basis-point tightenings. This will be a welcome development for the Fed.”

Joe Brusuelas, chief economist at RSM, said, “While I expect the Fed to lift the policy rate by 50 basis points at its December meeting, the supersize rate hikes are likely now in the rearview mirror.”

Yes, but: Although there was plenty of celebration of the better-than-expected inflation numbers, some analysts advised caution. Noting that the three-month average of core inflation was still running at 5.8%, well above the Fed’s target of 2%, Bloomberg’s Jonathan Levin said that “optimists would do well to take a step back and temper their enthusiasm.”

Diane Swonk, chief economist at KPMG, said there’s no reason to think the Fed is ready to pivot to a dovish stance. “The Fed will be comfortable with half percent, knowing they can go another half percent,” she said, referring to upcoming interest rate adjustments. “That’s not a big step down. They’re still tightening. It was never a pivot.”

RSM’s Brusuelas noted that the Fed will need to see more consistent results before it makes sense to talk of a pivot – and that interest rates could still move considerably higher than the current range between 3.75% and 4% before the bank is finished. “Another 2-3 months of data like that and we can start to talk about a pause in the policy path to restore price stability to ascertain the impact of past rate hikes,” he said, adding his projection that, “For now, 50 [basis points] in December & a peak of 5-5.25% in Q1'23.”

Dallas Fed President Lorie Logan affirmed that general outlook in a speech Thursday. “This morning’s CPI data were a welcome relief, but there is still a long way to go,” she said. “While I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.”

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