The Fed’s Preferred Inflation Measure Eased in October

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The Fed’s Preferred Inflation Measure Eased in October

A closely watched inflation indicator continued to show signs of abating in October, providing encouraging news for the Federal Reserve as officials try to assess whether they need to take further action to fully curb rapid price increases.

The inflation measure of personal consumption expenditures, which the Fed refers to when it says it aims for inflation to average 2 percent over time, rose 3 percent over the year through October. That was down from 3.4 percent the previous month and in line with economists’ forecasts. Compared to the previous month, prices remained unchanged.

After volatile food and fuel prices were stripped out to provide a clearer view of underlying price pressures, inflation rose 3.5 percent for the year. That was a decrease from 3.7 percent previously.

The latest signs that price increases are slowing came with other positive news for Fed officials: consumers are spending less heavily. A measure of personal consumption rose 0.2 percent since September, a slight slowdown from the previous month.

The report could provide Fed officials with key insights as they prepare for their final meeting of 2023, which takes place Dec. 12-13. While investors widely expect policymakers to leave borrowing costs unchanged at the meeting, central bankers are set to release a series of new economic forecasts that could provide clues to their future policy plans. Jerome H. Powell, the Fed chair, will also hold a news conference.

“They will continue to want to be careful not to declare too soon that their mission is accomplished,” said Omair Sharif, founder of Inflation Insights. Still: “We had a number of really good readings.”

Policymakers have been closely watching how both inflation and consumer spending evolve as they consider how to proceed. They have already raised interest rates to 5.25 to 5.5 percent, the highest level in more than two decades. With that in mind, many officials have signaled that it may be time to pause and watch how the policy evolves.

John C. Williams, the president of the Federal Reserve Bank of New York, indicated in a speech on Thursday that he expected inflation to moderate enough that the Fed would now be done raising interest rates, although officials said the interest rates could rise even further when the data is available surprised her.

“If price pressures and imbalances persist more than expected, further policy tightening may be necessary,” Williams said. He reiterated his assessment that the Fed is “at or near the maximum level of the federal funds rate target range.”

The economy has been more resilient to higher borrowing costs than many expected, which is one reason the Fed has maintained its cautious stance. If strong demand gives companies the ability to further raise prices without losing customers, it could become harder to fully defeat inflation.

However, recent signs that consumers and businesses are finally becoming more cautious have been welcomed by the Fed.

“I am encouraged by the early signs of a slowdown in economic activity in the fourth quarter, based on available data,” Christopher Waller, a Fed governor, said this week. He added that “inflation is still too high and it is too early to say whether the slowdown we are seeing will be sustained.”

Mr. Sharif noted that discussions on Wall Street have focused on when the first rate cut might come, and that the Fed’s upcoming economic forecasts should shed light on that. Some comments from Mr Waller this week fueled speculation that there could be early cuts next year.

But “you don’t want to get too far ahead of your skis for now,” Mr. Sharif said, pointing out that the data has gotten better in the past before getting worse again. He doesn’t think the Fed wants to talk too forcefully about rate cuts until it has data for late 2023 and early 2024.

“I just think they want to stay a little cautious right now,” he said.