US inflation fell to 3.2 per cent in October, lower than the estimated rate and the first decline in four months. Consumer prices increased 3.2 per cent year on year, down from the annual rate of 3.7 per cent in September. The central bank held the benchmark interest rate steady earlier this month, and investors have been growing more confident that rates have reached their peak. However, futures markets on Monday afternoon were pricing in a 13 per cent chance of a further rate rise at the Fed’s next meeting in mid-December. Core inflation, which excludes volatile food and energy prices, was also slightly weaker than economists had forecast, dipping from 4.1 per cent to 4.0 per cent year on year.
Chairperson Jay Powell stressed last week that policymakers would not be deceived by a few good months of data, and that the central bank could tighten monetary policy further if necessary. Stronger-than-expected gross domestic product growth has fueled fears that the slowdown in inflation could come to a halt. However, the Fed is increasingly expected to push back the timing of rate cuts deeper into 2024 if consumer prices remain persistently high. One potential issue is that rising confidence over the economy could push down Treasury bond yields and drive down the cost of capital for companies, potentially causing another rise in inflation. Tightening financial conditions in equity and bond markets earlier in the autumn had been welcomed by Fed officials, but that optimism led some investors to warn about the possibility of an “endless loop.”
In summary, US inflation has seen a decline to 3.2% in October, lower than expected and the first decline in four months. Despite the central bank holding steady earlier this month, there is an increasing expectation that rates will be pushed back further into 2024 if consumer prices remain stubbornly high. If conditions tighten to bring inflation to 2% in a “timely and sustainable way”, financial officials believe the economy will see a positive impact. However, markets have shown caution regarding continuing rising inflation and potential rate rises in the coming months.