U.S. Inflation Cools to 3.2%: Will the Fed Hit Pause on Rate Hikes?

A clearance sale sign is displayed at a retail store in Downers Grove, Illinois, U.S., on August 14./AP-Yonhap News

According to analysts, the U.S. consumer price inflation rate in October has slowed, easing pressure on the Federal Reserve (Fed) to raise its benchmark interest rate.

The U.S. Department of Labor announced on the 14th (local time) that the Consumer Price Index (CPI) inflation rate in October was 3.2% year-on-year, 0.5% lower than the 3.7% in September and the weakest since July’s 3.2%.

Notably, the core CPI inflation rate, excluding volatile energy and food prices, continued to slow at 4.0% year-on-year. Although it increased by 0.2% compared to the previous month, it is the lowest figure in two years and two months since September 2021, when it was 4.0%.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is seen chatting with attendees before delivering a speech at the Fed’s 100th-anniversary conference in Washington D.C., U.S., on the 8th (local time)./AFP-Yonhap News

The core CPI inflation rate is considered a better predictor of future inflation trajectory than the overall CPI figure and is a price index that the Fed values.

The year-on-year CPI and core CPI inflation rates both fell below the expert estimates compiled by the Wall Street Journal (WSJ), at 3.3% and 4.1%, respectively.

The slowdown in the CPI inflation rate is due to a decrease in automobile prices. The WSJ’s October and core CPI inflation rates were 3.3% and 4.1%, respectively, year-on-year.

A chart showing the trend of the U.S. Consumer Price Index (CPI) inflation rate./Captured from U.S. Department of Labor data

The slowdown in the October CPI inflation rate was mainly due to a drop in oil prices. Energy prices fell by 2.5% month-on-month, particularly gasoline prices, which dropped by 5.0%. The Department of Labor explained that prices of used cars and trucks (-0.8%) and airfares (-0.9%) also fell month-on-month, contributing to the slowdown in the inflation rate.

The price index announced today fell below market expectations, causing a sharp drop in U.S. Treasury bond prices and a decline in the dollar’s value.

There is growing speculation that the Fed may keep its benchmark interest rate unchanged at its last Federal Open Market Committee (FOMC) meeting of the year scheduled for December.

The WSJ said, “The likelihood of the Fed’s rate hike ending has increased with the cooling of inflation.” The New York Times (NYT) analyzed, “The pressure to raise rates at the Fed has decreased with an optimistic inflation report,” adding, “The final rate hike has been discussed by central bank (Fed) governors, but the lower-than-expected October inflation report could cool things down.”

The WSJ explained, “The core CPI in October has been rising for five consecutive months at a much lower level than in the past two years,” and “This series of low figures is what Fed officials have long said is necessary to be confident that no further rate hikes are needed.” The core CPI inflation rate has been recorded at an annual rate of 2.8% for the last five months up to October.

The senior economist at Nationwide Life Insurance, Cash Boschanik, evaluated the figure as “very encouraging,” saying, “This can reduce the pressure on policymakers to raise interest rates further.”

Thomas Barkin, President of the Federal Reserve Bank of Richmond, supported the decision of the November FOMC to freeze the Fed’s benchmark interest rate at the current level of 5.25∼5.50% at an event held in Westminster, South Carolina, after the announcement of the consumer price index.

By. Ha Man Joo