Following another big rate hike by the Fed last week, inflation showed signs of cooling in October, as prices rose 0.4 percent compared to September and 7.7 percent compared to October 2021. While that's still higher than anything seen in the past 40 years, it is the lowest reading since January, when prices had climbed 7.5 percent year-over-year. A deceleration in food prices as well as decreases in prices for used cars, apparel and medical services helped keep inflation below expectations, despite a rebound in energy prices after three months of declines.
The less volatile core CPI-U excluding food and energy rose by 0.3 percent in October, half the rate of the previous month. Year-over-year, core inflation came in at 6.3 percent, slightly down from the September reading of 6.6 percent, which had been the highest since August 1982. While Fed Chairman Jerome Powell acknowledged that "a series of down monthly readings" would be "good evidence" of inflation coming down at a press conference last week, Powell warned that he "never thought of that as the appropriate test for slowing the pace of [rate] increases," which is why today's reading likely won't sway him toward a less hawkish stance in the short term.
When inflation started spiking in the spring/early summer of 2021, it was largely due to the so-called base effect, reversing the pandemic’s cooling effect on consumer prices a year earlier. At the onset of the pandemic, prices had taken a dive due to a sudden drop in consumer spending and fuel demand before slowly climbing back to their pre-pandemic trajectory over the summer and fall. Due to that initial dip in consumer prices, year-over-year comparisons were always going to be exaggerated for a while, but that is no longer the case.