A closely watched measure of inflation showed continued signs of fading in October, encouraging news for the Federal Reserve as officials try to assess whether they need to take more action to completely eradicate rapid price increases.
The personal consumption expenditures inflation measure, which the Federal Reserve cites when it says it targets average inflation of 2 percent over time, rose 3 percent in the year through October. That was below 3.4 percent the previous month, and was in line with economists’ forecasts. Compared to the previous month, prices remained stable.
After excluding volatile food and fuel prices to get a clearer view of underlying price pressures, inflation rose 3.5 percent over the year. This figure was down from 3.7 percent previously.
The latest evidence that price increases are slowing came alongside other positive news for Federal Reserve officials: Consumers are spending less vigorously. A measure of personal consumption that rose 0.2 percent from September, marking a slight slowdown from the previous month.
The report could offer important information to Fed officials as they prepare for their final meeting of 2023, which will take place on December 12-13. While investors widely expect authorities to leave borrowing costs unchanged at the meeting, central bankers will release a new set of economic projections that could provide clues to their plans for future policies. Federal Reserve Chairman Jerome H. Powell will also hold a news conference.
“They will want to remain cautious about declaring ‘mission accomplished’ too soon,” said Omair Sharif, founder of Inflation Insights. Still, “we’ve had a number of really good readings.”
Policymakers have been closely monitoring both inflation and consumer spending as they assess how to proceed. They have already raised interest rates to a range of 5.25 to 5.5 percent, the highest level in more than two decades. In light of this, many officials have signaled that it may be time to stop and watch how policies develop.
John C. Williams, president of the Federal Reserve Bank of New York, hinted in a speech Thursday that he expects inflation to moderate enough for the Federal Reserve to stop raising interest rates now, although officials could raise interest rates further if the data was going to surprise them.
“If price pressures and imbalances persist longer than I expect, additional policy tightening may be necessary,” Williams said. She reiterated her assessment that the Fed is “at or near the top of the federal funds rate target range.”
The economy has been more resilient to those higher borrowing costs than many expected, which is one reason the Federal Reserve has maintained a cautious stance. If strong demand gives companies the ability to continue raising prices without losing customers, it could become more difficult to completely beat inflation.
That said, recent signs that consumers and businesses are finally becoming more cautious have been welcomed at the Federal Reserve.
“I am encouraged by early signs of moderation in economic activity in the fourth quarter, based on available data,” Federal Reserve Governor Christopher Waller said this week. Still, he added that “inflation remains too high and it is too early to say whether the slowdown we are seeing will be sustained.”
Sharif noted that conversations on Wall Street have focused on when the first decline in interest rates might occur, and the Federal Reserve’s upcoming economic projections should provide insight. Some of Mr. Waller’s comments this week fueled speculation that cuts could come early next year.
But “for now you don’t want to get too ahead of your skis,” Sharif said, noting that the data has improved in the past before getting worse again. He doesn’t think the Fed will want to start talking too forcefully about rate cuts until it has data for late 2023 and early 2024 in hand.
“I just think they’re going to want to be a little cautious right now,” he said.
