Inflation Dramatically Eases in October as Fed Rate Hikes Take Hold on US Economy

The inflation that has plagued Americans since the end of the pandemic dramatically eased in October, giving the Federal Reserve even more reason to skip raising interest rates at its meeting next month.

The personal consumption expenditures price index, one of the most closely watched inflation indicators, rose 3% in October over the previous 12 months, according to new data from the Commerce Department's Bureau of Economic Analysis. That compares to a 3.4% year-over-year rise in September and August.

Core PCE, which excludes volatile energy and food prices, came in at 3.5%. That compares to 3.7% in September and 3.8% in August, the data released Thursday shows. Economists polled by Dow Jones expected it to come in at 3.5%.

Core PCE is the Federal Reserve's preferred inflation indicator and weighs on its decisions in setting interest rates. It is a measure of what consumers are spending on goods and services — activity that comprises about two-thirds of the economy. Overall, core PCE is down from its peak of over 5.5% in February 2022, but is still higher than the Fed's 2% target.

Stocks rallied on the news with Dow Jones Industrial Average up more than 325 points or about 0.9% to a new 2023 high.

Month over month, the PCE price index was just about flat. It rose less than 0.1%, compared to 0.4% in September, and Core PCE rose 0.2% compared to 0.3% in the previous month.

The report showed slowing wage gains amid a still competitive labor market. Personal income rose at a 0.2% monthly rate to $57.1 billion. It rose 0.4% in September and 0.5% in August.

Services drove inflation more than goods in October. The largest contributors to inflation within services were international travel, health care, food services and accommodations. Energy, including gasoline, was the largest contributors within goods, the report said.

The latest PCE reading follows a report on Wednesday, showing the U.S. economy grew at a staggering 5.2% in the third quarter – a growth rate that could sustain high inflation and the elevated interest rates needed to curb it. But more recent anecdotal data from the Federal Reserve's Beige Book survey, released Wednesday, suggested parts of the economy are slowing.

"The report is consistent with the Fed’s goals for slower economic growth in order to combat inflationary pressure and may support a continued pause in rate hikes at their next scheduled meeting in December," said Sam Millette, director of fixed income investment at Commonwealth Financial Network in Waltham, Mass, before release of the PCE data.

A lower PCE reading eases pressure on the Fed to raise interest rates. To bring inflation down to its target rate, policymakers have raised rates 11 times since March 2022 to a 22-year high of 5.25% to 5.5%.

Almost no one expects the central bank to raise rates when it meets Dec. 12-13, according to the CME FedWatch Tool. The tool, which is based on Fed funds futures trading, is showing a 99% chance that the Fed will not raise rates at its next meeting and a 95% chance it won't raise in January.

"The anecdotal evidence suggests the Fed is getting what it wished for, said Jeffrey Roach, chief economist for LPL Financial in Charlotte, N.C., before the release of the PCE report. "As pricing pressures will likely ease further in months ahead, markets can reasonably expect the Fed to pause until the middle of next year when the Fed could modestly cut rates."