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The numbers: The cost of living rose a relatively modest 0.4% in October, a sign that price pressures in the U.S. are easing after the biggest surge in inflation in 40 years.
Economists polled by The Wall Street Journal had forecast a 0.6% increase in the consumer price index.
The smaller-than-expected rise in inflation gave a huge boost to stock prices early Thursday. Bond yields also fell.
Wall Street investors hope a slowdown in inflation will allow the Federal Reserve to ease off on its rapid series of interest-rate hikes aimed at slowing the economy.
The yearly rate of inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.
In another positive sign, the so-called core rate of inflation, which omits food and energy, rose just 0.3%. Wall Street had forecast a 0.5% increase.
The increase in the core rate over the past year dropped to 6.3% in October from a 40-year peak of 6.6% in September.
The Fed views the core rate as a more accurate measure of future inflation trends.
Key details: The cost of gasoline rose for the first time in three months after the OPEC oil cartel cut production.
Grocery prices also increased 0.4% and are up 12.4% in the past year. That’s the fastest increase since 1979.
Rents jumped 0.7% in October and have risen 7.5% in the past year, the biggest gain since 1982. Rents are starting to ease, but they are still high.
On the other side of the ledger, the cost of medical care fell 0.5% last month after a recent runup. Much of that decline reflected government revisions after it was found the cost of health insurance didn’t rise as much as previously reported.
Medical costs have risen a sharp 5% in the past year, however.
The price of used cars fell for the fourth month in a row. Prices also declined for clothing, home furnishings and airfare.
Inflation-adjusted wages fell slightly in October and are down 2.3% in the past year. Households have to spend more — sometimes drawing on their savings — to maintain the same standard of living because of high inflation.
Big picture: A surge in inflation to a four-decade high over the summer is slowing, but is it happening fast enough for the Fed? The central bank worries inflation will become entrenched in the economy unless it’s brought to heel soon.
Yet the Fed’s main tool to squelch inflation — higher interest rates — also threatens to slow the economy to a crawl or even plunge it into recession. The bank has jacked up a key short-term rate to a top range of 4% from near zero in the spring.
Senior Fed officials are expected to raise interest rates again at their December meeting, but it’s unclear by how much. They will see another CPI report ahead of that decision, which could sway how far they decide to go.
“It does give them cover to move at a slower pace,” said chief economist Richard Moody of Regions Financial. “But they are not done yet.”
Looking ahead: “This is a positive sign that inflationary pressures are starting to come off the boil,” said Cailin Birch, global economist at the Economist Intelligence Unit. “However, this is only a minor slowdown in year-on-year inflation, and several months of such declines will be necessary before the Fed considers pausing its tightening cycle.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
opened sharply higher in Thursday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
sank below 4%.
