October inflation dips to lowest level so far in 2022 — will it slow the Fed's next rate hike?

The annual level of inflation continued to improve in October, registering the smallest monthly increase since the beginning of 2022, according to the latest report from the Bureau of Labor Statistics (BLS).

The Consumer Price Index (CPI), a measure of inflation, rose 7.7% year-over-year in October, a slowdown from the 8.2% increase in September. On a monthly basis, inflation rose 0.4%, the same increase as in September, the BLS said. 

Overall, prices for shelter, food and gas increased in October, with prices for shelter contributing to over half of the monthly all items increase. The food index rose by 0.6%, the same level it increased in September, while the home index jumped by 0.8%, up from 0.7% last month. 

Gas prices, which had helped offset price increases in other areas of the economy over the last several months, rose 4.0% in October, after decreasing 4.9% the month before.

"Today's CPI reading for October is a good sign for consumers who have been struggling the last few months to absorb the continued squeeze of inflation on household budgets," Scott Brave, the head of economic analytics at Morning Consult, said. "Combined with Morning Consult's latest data on purchasing power and inflation-adjusted monthly spending, it suggests households received a welcome reprieve from the sting of inflation last month."

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Inflation numbers show that 'the worst is perhaps behind us,' expert says

October's inflation numbers were a larger month-on-month decrease than anticipated and represent the fourth straight monthly decline.

The lower-than-expected numbers came as welcome news to President Biden, who said it was a sign that tightening monetary policy is having its intended effect. 

"Today's report shows a much-needed break in inflation at the grocery store as we head into the holidays," Biden said in a statement. "It has been a hard two years to recover from where things were in January 2021."

"But our economy has reopened, new jobs are being created, new businesses are growing, and now, we are seeing progress in getting inflation under control – with additional measures taking effect soon," Biden continued.

October's figures could indicate that "the worst is perhaps behind us," Ben Waterman, the co-founder and chief operating officer of personal finance platform Strabo, said.

"While we are certainly not yet in the clear, this is exactly what we would like to be seeing, and perhaps signals that the surge in prices in 2022 may be starting to fade," Waterman said.

However, Waterman said that he still expects the Federal Reserve to raise rates again to as high as 5%. 

"Ongoing reports of a tight labor market will continue to fuel wage inflation unless addressed - this suggests deeper-rooted issues that will take slightly longer to assuage," Waterman continued.

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All eyes are on Fed's December meeting and how high it will raise rates

The Federal Reserve is expected to continue its interest rate policy and raise rates in December. However, one financial expert believes the latest inflation figures may be the ammunition the Fed needs to begin slowing the pace of rate increases as early as its next meeting.  

In November, the Fed increased rates by 75 basis points for the fourth time this year and cited the still-high inflation numbers as one of the reasons it continued with its aggressive monetary policy. The Fed has set a 2% inflation target.

"Today's report provides some evidence of inflation softening and may prompt discussion of an eventual shift by the Fed," Jason Pride, the chief investment officer of private wealth at Glenmede Trust Company, said. "After moving rates swiftly to neutral throughout the year, the Fed has adopted a more data-dependent approach to rate hikes going forward as it remains laser-focused on the price stability half of its dual mandate."

"Still, we suspect that the Fed may see one month as not providing that big of a shift or that consistent of a trend, when its goal is to bring inflation back to 2%," Pride continued.  

Callie Cox, a U.S. investment analyst at eToro, said that "early signs of a peak" in services inflation – which slowed to 0.5% in October from 0.8% the month before – could allow the Fed to take its foot off the break.

"That's the kind of inflation the Fed can control because it's more a function of demand than supply," Cox said. "The CPI report could be a relief, but we have no idea what's coming down the road."

Though the price of shelter increased in October, it is worth noting that home prices are highly lagged, according to former White House economic advisor Tomas Philipson.

"The Fed is often focused on month-to-month core inflation, which for October was mainly driven by shelter that makes up 40 percent of core inflation," Philipson said. "But we are currently in a housing recession. Therefore, actual October inflation is likely less than the October CPI measures it to be."

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