US Fed’s preferred inflation gauge slowed in October

US prices measured by the personal consumption expenditures index climbed 6 per cent over the year to October, down from the 6.3 per cent to September. PHOTO: AFP

NEW YORK – Inflation in the United States showed welcome signs of slowing in October, but it remained uncomfortably rapid even as a spate of economic data underscored that a return to normal price increases could take time.

Prices measured by the personal consumption expenditures index, the measure that the Federal Reserve watches most closely, climbed 6 per cent over the year to October inclusive, the report showed, in line with what economists in a Bloomberg survey had expected. This was down from a 6.3 per cent increase over the year to September.

A core price measure that strips out food and fuel costs, one that the Fed watches closely for a sign of what might come next with inflation, eased slightly to 5 per cent. It has been hovering around that level throughout the year, so while the recent moderation is a step in the right direction, it is not conclusive.

Other economic data provided fresh evidence of continued economic momentum. Consumer spending was accelerating, incomes were rising and jobless claims stayed muted, reports on Thursday showed, suggesting that the economy remains resilient as workers benefit from plentiful jobs and use their savings to continue shopping. Sustained demand and a solid labour market could help to prevent an abrupt recession – but they could also help companies to continue raising prices, prolonging the journey back to normal inflation.

The Fed is closely watching how inflation evolves as it tries to determine how high to raise interest rates and how long to keep them elevated. The US central bank has raised borrowing costs to nearly 4 per cent this year from near zero in March, including a rapid series of three-quarter-point moves. Fed chair Jerome Powell signalled clearly on Wednesday that central bankers are poised to slow their rate increases in December. The question now is when, and at what level, they will stop raising borrowing costs.

Mr Powell suggested that rates would probably need to climb slightly higher than the 4.6 per cent peak that officials anticipated in September, when they last released economic forecasts. Investors now see rates peaking between 4.75 per cent and 5 per cent before coming down slightly late in 2023, based on market pricing.

“Ongoing increases will be appropriate,” Mr Powell said this week. “We have a long way to go in restoring price stability.”

Mr John Williams, president of the Federal Reserve Bank of New York, said in an interview with Fox Business on Thursday that the Fed had “a ways to go” in raising interest rates, but there were good signs that “inflation is turning”.

“We are moving now, and into next year, with a lower inflationary trend,” Mr Williams said.

Many economists think that inflation will meaningfully decelerate in 2023, because market-based rent prices are beginning to cool, supply chain problems have eased and consumers have been shifting their spending away from goods and towards services, which should help prices for physical products, like couches and clothing, to moderate.

It is difficult to predict what will happen next with inflation in part because the economy, which had slowed meaningfully this year, seems to be resilient and possibly even re-accelerating in the face of higher prices and interest rates.

Consumption climbed 0.8 per cent in October from the prior month, Thursday’s data showed, up from a previous gain of 0.6 per cent. Adjusted for inflation, spending climbed 0.5 per cent.

More recent anecdotal data suggests that the holiday shopping season is off to a strong start: Retail sales over the Thanksgiving weekend were up 10.9 per cent from the prior year, excluding cars and not adjusting for inflation, based on Mastercard data.

Americans are being buoyed in part by a strong labour market that is helping them to take home more money, and by one-time payments from states, some of which have stimulus money left to disburse or are benefiting from strong tax receipts.

Personal income rose 0.7 per cent in October, and 0.4 per cent after adjusting for inflation, Thursday’s data showed. This was the biggest inflation-adjusted increase since July.

At the same time, people seem to be growing more price-sensitive as their savings run down and expensive food and petrol weigh on family budgets. Stores have begun to discount products again to lure and retain customers, which could help to reduce inflation, if it is drastic enough. NYTIMES

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