October Inflation Dips to 7.7% Fueling Hopes for ‘Soft Landing’

The nation’s closely watched Consumer Price Index fell to a nine-month low of 7.7% in October, as the impact of rising interest rates and weaker consumer demand saw the key benchmark post its fourth consecutive decline.

According to the latest government data from the Bureau of Labor Statistics, while the headline number was lower than expected and down from 8.2% in September, the so-called core inflation rate, which excludes the volatility of food and fuel prices, also fell, albeit by a more modest 0.3% to 6.3%.

“It’s just one month, and we’ve seen months like this before, but this is exactly what we want to be seeing,” Mike Konczal, director of Macroeconomic Analysis at the Roosevelt Institute, told followers on Twitter, noting that the decline in core inflation was driven by both deflation in goods and services declining.

“This is what a soft landing would look like,” he added.

As much as the downtrend in prices was welcome news to investors and consumers, several key categories continue to plague household budgets and confidence. Food prices were up 10.9% from a year ago, with “food at home” (e.g. groceries) up 12.4% from 2021 levels. This compares to a more modest 8.6% annual increase in restaurant prices or “food away from home.”

Although the average price of gasoline has fallen to $3.90 per gallon since a peak of $5.10 in mid-June, fuel and energy prices continue to post some of the largest increases, specifically, a 14% year-over-year increase in electricity, an 18.1% annual jump in motor fuels and a 68% spike in heating and fuel oil from last October.

Other areas that continue to take an outsized bite of consumers wallets include rents, which rose 7.5% versus a year ago with air fares up 43%.

On the weak side, while new car prices posted an 8% year-over-year gain, used car and truck prices rose just 2% last month and apparel prices also rose less than the index average, falling 0.6% from September while inching up just 4.1% from last year.

The Response

As much as inflation is impacting consumer shopping habits, it is also affecting businesses and borrowers, both of which are feeling the side effects of the Federal Reserve’s four consecutive rate hikes which have taken the central bank’s benchmark to 4% from 1% in May.

As a result, other key borrowing barometers have also been on the rise, including the 30-year mortgage rate, which has jumped above 7% to levels not seen in 20 years, an increase that has hammered home sales. Credit cards and other revolving debt rates are also up, a reality that has seen a growing number of reports about slowing demand, changed buying behavior and rising delinquencies.

While the goal of the inflation-fighting rate increases is designed to weaken demand and serve as a headwind on the broader economy, the latest report issued on third-quarter gross domestic product (GDP) in late October showed a surprisingly resilient 2.6% advance.

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