Did inflation finally hit its peak? What the 7.7% price rise tells us.

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Did inflation finally hit its peak? What prices rising ‘only’ 7.7 percent in the last year tells us.

Inflation is still high, but it’s fallen to its lowest rate this year, according to the latest Bureau of Labor Statistics report.

Think of it how Democrats are thinking about their own performance in the midterm elections: Objectively, it’s not doing great, but it’s going in the right direction — and might be better than expected.

The latest report, which analyzes inflation in October, marks an improvement over September’s numbers. Prices went up 0.4 percent in October, the same rate as prices increased in September. While still high comparatively, it is less than analysts expected — Bloomberg forecasters anticipated 0.6 percent monthly inflation and 7.9 percent annual inflation. Annual price increases year-over-year are now markedly lower, up 7.7 percent instead of 8.2 percent as in September.

The underlying causes of inflation in the latest report also point to signs of improvement. In the past year, “good” inflation months happened when energy costs dipped. In July, for example, monthly inflation was zero, largely due to the decline of gas prices. One reason why September’s inflation numbers were so worrisome is because gas prices fell but inflation was surprisingly high. Falling gas prices kept September inflation down to 0.4 percent, but that also meant “core inflation” — inflation rate when omitting food and gas prices — was worse.

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In October, however, gas prices rose modestly but overall price increases were lower than expected.

Gas prices actually increased by 4 percent, and food prices rose 0.3 percent. Counterintuitively, the fact that the overall inflation rate remained the same despite those changes is good news. Core inflation, which strips out energy and food prices, rose 0.3 percent in October and 6.3 percent over the year, while analysts expected growth of 0.5 percent and 6.5 percent annually.

While of course consumers care deeply about the price of food and the price of gas, economists often use the core measure to get a sense of how the underlying rate of inflation is in the whole economy, because food and gas can be driven by changes in commodity prices (see war, Russia).

The stock market is responding to the better-than-expected report. Stocks opened up sharply Thursday morning as traders anticipated that the more-mild-than-expected inflation numbers would confirm their hunch that the Federal Reserve would ease off on either the number or the magnitude of planned hikes in interest rates.

“This inflation report was a nice surprise. Inflation has been very slow to come down, but this report gives up hope that this deceleration with pricing pressures might bring back hopes of a soft landing,” Edward Moya, senior market analyst at OANDA, wrote in a note. “US stocks are rallying as Wall Street finally sees light at the end of the Fed’s tightening cycle tunnel. This cool inflation report helped stocks post their best trading day in two years.”

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The Fed is likely to raise interest rates by 0.5 percent in December, the Wall Street Journal reported, which would be the seventh straight increase this year, but a break from the four straight 0.75 percent hikes.

“In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance,” Federal Reserve Bank of Philadelphia President Patrick Harker said in a talk Thursday. “At some point next year, I expect we will hold at a restrictive rate for a while to let monetary policy do its work.”

Some economists, like the University of Michigan’s Justin Wolfers, have said that inflation has likely peaked and will continue to come down from its high levels.

The name of the game in the inflation numbers right now is housing, food and energy

Much of the reason that overall inflation didn’t decrease more was due to “shelter” — the government bean-counters’ term for housing. While other major components of inflation have been bouncing around, housing prices as measured by the Bureau of Labor Statistics have been steadily rising. In the spring of this year, shelter costs were rising around 0.5 or 0.6 percent per month, which has now risen to closer to 1 percent a month. In terms of an annual increase, shelter costs a year ago were rising at about half the rate they’re rising today.

Shelter, which accounts for about a third of the consumer spending tracked by the Bureau of Labor Statistics, made up over half of the total month-over-month increase in prices, rising 0.8 percent in October and 6.9 percent over the year.

But that number could start falling early next year. The annual increase in housing costs, as measured by the Fed, has been growing since early 2021. But according to private sector researchers like those at Zillow, rent growth actually peaked and has been falling since early 2022.

Bureau of Labor Statistics and Zillow researchers found that the Fed’s housing cost index tends to lag private sector indexes of rent growth by about a year, meaning that the Fed’s shelter index should start to turn early next year.

Against a backdrop of rising housing, energy and food prices, the relatively pacific inflation numbers this month largely came down to big slowdowns in price increases and even declines in other major spending categories. The Fed’s medical care index fell in October, as did prices for used cars — a major driver of inflation since 2021 — and clothing. If these trends continue and shelter inflation turns around early next year, overall inflation could be far more mild in 2023 than it was in the epochally hot year of 2022.

Thanks to Lillian Barkley for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.