Inflation slowed in October, according to data closely tracked by the Fed

A measure of inflation closely monitored by the Federal Reserve eased but remained elevated in October.

Thursday’s report from the Department of Commerce found that prices rose 6% in October from a year earlier. The increase in personal consumption expenditure was the smallest since November 2021 and was lower than September’s 6.3%. Excluding volatile food and energy prices, so-called core inflation over the previous 12 months was 5%, down from 5.2% in September.

The report also showed that consumers spent more in October, even after adjusting for inflation, a sign of their continued willingness to spend despite high prices. Spending rose 0.8% from September to October, or 0.5% after factoring in price increases. At the same time, after-tax income adjusted for inflation increased by 0.4%.

However, many Americans are deposit into their savings to keep up with rising prices. The savings rate fell to 2.3% in October, the lowest level since 2005.

“Consumer spending held up in October, but the outlook for holiday spending is unpredictable with the savings rate nearing a record low,” Bill Adams, chief economist at Comerica Bank, said in a research note.

In response to the worst inflation since the early 1980s, the Fed has done just that increased its reference rate six times since March, and the past four increases have each been by a hefty three-quarter point. The central bank hopes to complete the difficult task of bringing inflation back to its annual target of 2% without triggering a recession.

In recent months, inflation has fallen from the four-decade highs reached earlier this year. And most economists expect the Fed’s aggressive tightening to push prices down further.

“We expect a lot more good news on inflation in the coming months,” Paul Ashworth, North America chief economist at Capital Economics, wrote in a research note.

Potential delay of Fed hikes

Fed Chairman Jerome Powell said in a speech Wednesday that the central bank could delay rate hikes to half a point at the next meeting in two weeks – a message that sent cheers through the financial markets. But at the same time, Powell made it clear that policymakers intend to keep their policy rates – which affect many consumer and business loans – at high levels for an extended period of time.

The Fed’s series of aggressive rate hikes has significantly increased borrowing costs across the economy. The housing market in particular has been hit hard by a doubling of mortgage interest relief compared to a year ago: sales of previously occupied homes have fallen for nine months in a row. Many economists expect the United States to slip into recession next year as the effects of those higher borrowing rates take root.

Signs of resilient economy

But meanwhile, the overall economy is showing signs of surprising sustainability. On Wednesday, the government estimated that the economy was growing robustly Annual rate of 2.9% from July to September. The labor market, the main barometer of economic health, remains robust. Employers have added a healthy average of 407,000 jobs per month so far this year, and unemployment has remained low for nearly half a century.

The Fed is believed to track the inflation gauge released Thursday, the so-called personal consumer spending price index, even more closely than the government’s better-known consumer price index. The government has reported that the CPI rose 7.7% in October from 12 months earlier, down from June’s 9.1% year-over-year increase, the largest increase in four decades.

The PCE index generally shows a lower level of inflation than the CPI. In part, this is because rents, which have soared, weigh twice as much in the CPI as in the PCE.

The PCE price index also tries to account for changes in how people shop when inflation jumps. This allows it to record, for example, when consumers switch from expensive national brands to cheaper retail brands.

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