Inflation eased more than expected, consumer prices increase 7.7% on year

Inflation is easing as consumer prices in October rose 7.7% from a year ago, the lowest annual gain since January 2022. The increase recorded by the Bureau of Labor Statistics was below analyst expectations of 7.9%.

Monthly prices also fell below expectations, up 0.4% compared to 0.6% expected. Annual core inflation, which strips out food and energy, dropped down from the four-decade high it set last month to a 6.3% annual rate.

The headline numbers had markets soaring Thursday morning, the Dow rose 800 points at market open because of the news. Traders indicated they think this could be enough to slow the pace of the Federal Reserve’s rate hikes, which have been at breakneck speed for months. For four straight meetings, the Fed has raised the benchmark interest rate by 75 basis points, once considered a jumbo hike.

The Fed hinted at slowing the pace during its last meeting and the market now believes it will hike the rate in December by 50 basis points. But Fed Chair Jerome Powell also warned that the interest rate level they will need to reach to effectively crush inflation will be higher than previously thought. The current target rate is 3.75%-4%, the highest it has been since the beginning of 2008.

Beyond the headline

After three straight months of declines, the energy index did tick up slightly in October, up 1.8% on the month and 17.6% on the year. But prices continued to fall in October for used cars and apparel, down 2.4% and 0.7% month over month respectively. Medical services also saw a slight decline of 0.6% while medical care commodities was flat.

The shelter index, which carries about a third of the weight of the consumer price index, is still heated at 6.9% increase for the year, keeping core inflation high while other categories drop. Rent prices in October were up 7.5% annually, according to the index.

Groceries are still up 12.4% on the year in October, but only up 0.4% on the month, which is the smallest monthly increase since December 2021. The BLS said prices for fruit, vegetables and dairy all declined the month of October.