Inflation showed signs of slowing but remained stubbornly rapid in October as a spate of economic data Thursday underscored that a return to normal price increases will likely take time.
Prices as measured by the Personal Consumption Expenditures index, the measure the Federal Reserve watches closely, climbed by 6% in the year through October, the data showed, in line with what economists in a Bloomberg survey had expected. That was down from a 6.3% increase in the year through September, according to the Commerce Department.
A core price measure that strips out food and fuel costs, one that the Fed also watches closely for a sign of what might come next with inflation, eased slightly to 5%. It has been hovering around that level throughout the year, so while the recent moderation is a step in the right direction, it is far from conclusive.
Other economic data provided fresh evidence of continued economic momentum. Consumer spending was accelerating, incomes were rising and jobless claims remained muted, reports Thursday also showed, suggesting that the economy remains resilient as workers benefit from plentiful jobs and use their savings to continue shopping.
The Fed is monitoring how inflation evolves as it tries to determine how high to raise interest rates and how long to keep them elevated. Central bankers have raised borrowing costs to nearly 4% this year from near-zero in March, including a rapid series of three-quarter point moves.
Jerome Powell, the Fed chairman, signaled clearly Wednesday that central bankers are poised to slow their rate increases in December. The question now is when, and at what level, they will stop raising borrowing costs.
Powell suggested that rates will probably need to climb slightly higher than the 4.6% peak that officials anticipated in September, when they last released economic forecasts. Investors now see rates peaking between 4.75% and 5% before coming down slightly late in 2023, based on market pricing.
"Ongoing increases will be appropriate," Powell said this week. "We have a long way to go in restoring price stability."
COMPARING DATA
Thursday's inflation data follows a more timely Consumer Price Index report from the Labor Department, which showed price increases starting to moderate in October. The CPI data is tracked because it comes out more promptly and feeds into the Personal Consumption Expenditures data. But the Fed uses the latter figures as its official inflation target.
Central bankers aim for 2% annual inflation on average and over time, so the current pace of increase is still far faster than their goal. Given that so-called core inflation has been stuck around 5% all year, the Fed has been hesitant to make much of the recent cool-down in overall prices.
"Over 2022, core inflation rose a few tenths above 5% and fell a few tenths below, but it mainly moved sideways," Powell said this week, explaining that demand will need to remain slower, goods inflation will need to continue easing, and the labor market will need to come back into balance to return inflation to normal.
Many economists think that inflation will meaningfully decelerate in 2023, because market-based rent prices are now beginning to cool, supply chain problems have eased and consumers have been shifting their spending away from goods and toward services, which should help prices for physical products like couches and clothing to moderate.
Goldman Sachs economists said in their forecast in mid-November that inflation is likely to fall to about 3% by the end of 2023, after stripping out food and fuel prices. But last year at this time, they said they expected core inflation to fall to 2.3% by the end of 2022.
"Forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways," Powell said this week, adding later that "we're going to have to be humble and skeptical about forecasts for some time."
SAVINGS DROP
The saving rate fell to 2.3% in October, the lowest since 2005, the Commerce Department report showed.
Inflation-adjusted disposable income climbed 0.4%, the most in three months. Wages and salaries, unadjusted for prices, increased 0.5%. The report also noted that the one-time payments issued by states bolstered incomes in October.
Sustained wage gains, particularly in service sectors, are expected to keep inflation persistently higher than the Fed's goal for an extended period, underscoring the importance of the labor market to the Fed's decision-making in the months ahead.
Core services inflation that excludes housing and energy, a gauge Powell said Wednesday "may be the most important category for understanding the future evolution of core inflation," moderated in October from the prior month.
SPENDING UP
Americans continued spending in October, with personal consumption expenditures picking up even after adjusting for inflation, the data released Thursday showed.
Consumption climbed 0.8% in October compared with the prior month, up from a previous gain of 0.6%. Adjusted for inflation, spending climbed by 0.5%.
While economists expected those gains, they underscore that consumers remain resilient in the face of rapid price increases and rising interest rates.
Recent anecdotal data suggests the holiday shopping season is off to a strong start: Retail sales over the Thanksgiving weekend were up 10.9% from the prior year, excluding cars and not adjusting for inflation, based on Mastercard data.
But people are also becoming more price sensitive as their savings run down and expensive food and gas weigh on family budgets, and stores have begun to discount products again to lure and retain customers. That is expected to help lower inflation, if it is drastic enough and continues.
American spending is being buoyed partly by a strong labor market that is helping them to take home more money and by one-time payments from states, some of which have stimulus money left to disperse or are benefiting from strong tax receipts.
Personal income rose by 0.7% in October, and 0.4% after adjusting for inflation, Thursday's data showed. That was the biggest inflation-adjusted increase since July.
Information for this article was contributed by Jeanna Smialek of The New York Times and Reade Pickert of Bloomberg News (WPNS)