U.S. consumer inflation eased to 7.7% over past 12 months

WASHINGTON — Price increases moderated in the United States last month in the latest sign that the inflation pressures that have gripped the nation might be easing as the economy slows and Americans grow more cautious on spending.

Consumer inflation reached 7.7% in October from a year earlier and 0.4% from September, the government said Thursday. The year-over-year increase, down from 8.2% in September, was the smallest rise since January. Stripping out volatile food and energy prices, “core'' inflation rose 6.3% in the past 12 months and 0.3% from September.

Wall Street responded with its best day in more than two years. Investors saw grounds for hope that the Federal Reserve will take the new data as a cue to ease up on its aggressive plans for more interest rate hikes. The S&P 500 soared 5.5%, the Dow Jones Industrial Average climbed 1,201 points, and the Nasdaq composite jumped 7.4%.

"Finally a downside surprise on inflation — the market and the Fed can breathe a small sigh of relief," said Esty Dwek, chief investment officer at Flowbank SA. "Markets are understandably happy and believe the Fed will be able to downshift.

“We expect this to mark the start of a much longer disinflationary trend that we think will convince the Fed to halt its (hikes) early next year,” said Paul Ashworth, chief North American economist at Capital Economics, a consulting firm. “With supply shortages normalizing, deflationary pressure is now finally showing up.”

While the deceleration in core prices is welcome news, inflation remains much too high for comfort for the Fed. Chair Jerome Powell, who said this month that officials need to see a consistent pattern of weaker monthly inflation, also indicated rates will likely peak higher than policymakers previously envisioned.

Two Fed officials Thursday argued for moderating the pace of rate increases. Patrick Harker, who heads up the Philadelphia Fed, said that he expects the central bank to "slow the pace of our rate hikes as we approach a sufficiently restrictive stance." At a separate event, Dallas Fed president Lorie Logan said the CPI report was "a welcome relief, but there is still a long way to go." She also said, “we should also try, if we can, to avoid incurring costs that are higher than necessary.”

The inflation numbers were lower than economists had expected.

Helping drive the inflation slowdown from September to October were used car prices, which dropped for a fourth straight month. Prices of clothing and medical care also fell. Food price increases slowed. By contrast, energy prices rebounded in October after having declined in August and September.

In the metropolitan area, consumer prices rose 6% in October, compared with a year earlier on the higher cost of food and energy, among others, according to William J. Sibley, regional commissioner in the Manhattan office of the federal Bureau of Labor Statistics.

The increase was the smallest since February for the 25-county region that includes Long Island. The cost of gasoline in the region climbed 6.9% last month, compared with October 2021. Natural gas and electricity prices were up 24.1% and 10%, respectively. The cost of groceries rose 10.4%, year over year, with the biggest increases for cereal, baked goods, fruits and vegetables.

Households still 'struggle'

John A. Rizzo, an economist and Stony Brook University professor, said inflation is subsiding, which is a good sign for the overall economy. But he added: “Even if inflation is gradually declining, food and gas prices are still very high and causing a lot of pain,” and “many households continue to struggle.”

Businesses also are grappling with inflation.

“High prices are continuing to cause businesses to tighten their belts at a critical time for their finances, and while it appears the rate of increase is leveling off, it is not significant enough to provide relief yet,” said Matt Cohen, president and CEO of the Long Island Association business group.

At Christopher’s, a pub and eatery in Huntington Village, owner Jack Palladino said he’s paying more for eggs, seafood, cooking oil and other foodstuffs than a year ago. “We’re trying to recover from the pandemic when the economy is in the toilet,” said Palladino.

Many economists have warned that in continuing to tighten credit, the Fed could spark a recession by next year. The central bank has already raised its benchmark interest rate six times in sizable increments this year, heightening the risk that prohibitively high borrowing rates for homes, autos and other big-ticket items will tank the economy.

Some economists believe the most recent data shows the hikes are beginning to achieve their purpose, though the Fed needs to see further evidence.

Even before the release of Thursday’s figures, inflation by some measures had begun to ease and could continue to do so in coming months. There is evidence that the robust pay increases of the past 18 months have leveled off and begun to fall. Though worker pay is not a primary driver of higher prices, it can compound inflationary pressures if companies offset their higher labor costs by raising prices.

Except for automakers, which are still struggling to acquire the computer chips they need, supply chain disruptions have largely unsnarled.

Rents, according to outlets like ApartmentList and Zillow, have begun to fall and that should begin to show up in government data soon, signaling weaker inflation.

Despite fears of a recession, the nation’s job market has remained resilient. Employers have added a healthy average of 407,000 jobs a month, and the unemployment rate is just 3.7%, close to a half-century low. Job openings are still at historically high levels.

But the Fed’s rate hikes have inflicted severe damage on the American housing market. The average rate on a 30-year fixed mortgage has more than doubled over the past year and topped 7% this week. As a result, investment in housing collapsed in the July-September quarter, falling at a 26% annual rate.

With James T. Madore