US annual core inflation rate throws a surprise

In October, underlying US inflation rose by less than expected. This appears to be an encouraging sign of progress on the long road to taming inflation under the Fed’s 2% target.

The annual inflation rate in the United States slowed to 3.2% in October 2023, down from 3.7% in September and August and falling short of market expectations of 3.3%. In comparison to September, the CPI was unchanged, the lowest in fifteen months, and fell short of forecasts of a 0.1% increase, owing primarily to a drop in gasoline prices.

United States Core Inflation Rate throws a surprise. The annual core consumer price inflation rate in the United States, which excludes volatile items such as food and energy, edged down to an over two-year low of 4% in October 2023, from 4.1% in the prior month, while markets had expected it to remain steady at 4.1%. Monthly, core consumer prices went up by 0.2% from a month earlier in October, following a 0.3% increase in September and just below market forecasts of a 0.2% rise.

The yield on the 10-year US Treasury note fell by more than 10 basis points to 4.5% on Tuesday, the lowest level in seven weeks, as softer-than-expected price data reinforced expectations that the Federal Reserve may be done raising interest rates after its historical tightening campaign.

According to the most recent CPI data, headline inflation fell more than expected to 3.2% in October, while core inflation also fell more than expected. According to Fed Funds futures pricing, the results aligned with investors’ bets that the US central bank will refrain from delivering another rate hike, as policymakers are likely to pay attention to signs that the US economy is not as resilient to higher borrowing costs as previous quarters of 2023.

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, after increasing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.

The all items index rose 3.2 percent for the 12 months ending October, a smaller increase than the 3.7-percent increase for the 12 months ending September. The all items less food and energy index rose 4.0 percent over the last 12 months, its smallest 12-month change since the period ending in September 2021. The energy index decreased 4.5 percent for the 12 months ending October, and the food index increased 3.3 percent over the last year.

The index for all items less food and energy rose 0.2 percent in October, after rising 0.3 percent in September. Indexes which increased in October include rent, owners’ equivalent rent, motor vehicle insurance, medical care, recreation, and personal care.

At the recent FOMC press conference, Federal Reserve Chair Jerome Powell said that the economy has “been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate hiking cycles like this one”. Nonetheless, there was the acknowledgment that “the process of getting inflation sustainably down to 2% has a long way to go”.

Given that the economy only saw 4.9% annualized GDP growth in the third quarter and that the unemployment rate is only 3.9%, a number of FOMC hawks are still advocating for more interest rate increases on the grounds that they cannot afford to take any chances and let inflationary pressures flare up again.

While cautioning against being “misled by a few months of good data,” Federal Reserve Chair Jerome Powell did not rule out additional rate hikes in the future. The official Fed forecast for this year is still one more 25 basis point increase in interest rates. Rates were last raised by the Fed in July.