After months of stubborn inflation, glimmers of hope emerge

Fresh economic data released Thursday showed that inflation cooled more than expected in October, a hopeful development for American consumers and welcome news for the Federal Reserve and White House after months of stubbornly persistent price increases.

While inflation is still rapid and painful for many households, it is finally beginning to show signs of turning a corner. The consumer price index slowed to a 7.7% gain in the year through October, less than the 7.9% that analysts had expected and down from 8.2% in the year through September.

After stripping out food and fuel costs, both of which jump around, prices rose by 6.3% on an annual basis, down from 6.6% in the prior reading. And that core inflation measure pulled back sharply on a monthly basis, posting its slowest increase in more than a year.

The report provides early evidence that the Fed’s campaign to slow rapid inflation may be helping to ease price pressures, working alongside recent healing in supply chains. The central bank has lifted interest rates from near zero to nearly 4% this year as it tries to slow consumer and business demand and give supply a chance to catch up.

Stocks surged on the news, as investors took it as a sign that Fed officials might raise rates less aggressively and inflict less economic pain in their quest to tame inflation. The S&P 500 soared 5.5%, its best one-day performance since April 2020, which marked the early market recovery from a coronavirus-induced meltdown.

But a chorus of central bankers emphasized Thursday that there is more work to do to ensure that price increases return to a normal pace — and uniformly said that they are not done raising interest rates.

“This morning’s CPI data were a welcome relief,” Lorie Logan, the president of the Federal Reserve Bank of Dallas, said in a speech shortly after the report was released. “But there is still a long way to go.”

While Fed officials welcomed the inflation slowdown, they did so in a far more muted way than the White House: A single month of moderate improvement in the data was not enough to make central bankers confident that still-rapid price increases will quickly fade, especially after more than a year and a half of stubborn inflation and frequent false dawns.

The new data is still “far from a victory,” Mary Daly, the president of the Federal Reserve Bank of San Francisco, said during a question-and-answer session in a webcast with the European Economics & Financial Centre. She and her colleagues made clear that the path back to normal is a long and uncertain one.

Central bankers have signaled that they would like to slow their rate increases soon, and investors heavily expected that step-down to come in December after the new inflation figures.

But markets also dialed back how many rate moves they anticipated next year following the release, and Fed officials seemed to push back on that idea in remarks Thursday. A number of them suggested that interest rates will still need to rise to a level where they are clearly weighing down the economy, even if at a slower pace. Once rates are high enough, officials expect to hold them there for some time.

“The pace of hikes is less important than the strength and communication of this commitment,” Esther George, president of the Federal Reserve Bank of Kansas City, said in a speech Thursday afternoon.

In their latest economic projections, central bankers estimated that rates would move above 4.5% next year. Fed Chair Jerome Powell said during a news conference last week that they would likely need to go even higher, given how resilient the economy and inflation have proved since those estimates were released.

“We need to do more, and we will,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Thursday.

The Fed aims for 2% inflation on average over time, using a measure that is related to the consumer price index but comes out later in the month. Price increases remain far faster than that — and are expected to remain abnormally brisk through the end of this year.