Inflation Report Fuels Optimism On Fed's Next Move

Inflation cooled in October, with the consumer price index coming in at an annualized rate of 7.7%, according to the Bureau of Labor Statistics on Thursday.

That is down from 8.2% in September, and is the smallest annualized increase so far in 2022. The overall CPI rose 0.4% month-over-month in October.

The core rate of inflation, which excludes the volatile food and energy sectors, came in at 6.3%. That also represents a slowdown for the metric, which recently recorded a 40-year high.

A cooling of inflation is what the Fed is aiming for with its recent rounds of interest rate increases. Further drops in inflation would presumably remove some of the impetus for the central bank to continue its aggressive course of rate hikes.

At least some members of the Fed believe that a slower pace for rates hikes is now possible.

“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,” Philadelphia Fed President Patrick Harker said in a speech on Thursday to the Philadelphia chapter of the Risk Management Association.

This year's rise in interest rates — 3.75 percentage points so far — has spurred a drop of nearly 13% in CRE values from their most recent peak earlier this year, according to the Green Street Commercial Property Price Index in October.

The costs involved in both renting and owning a home were major drivers in the overall inflation rate in October. The BLS shelter index rose 0.8% in October, the largest monthly increase in that index since August 1990. The rent index rose 0.7% month-over-month.

Even so, shelter is considered a lagging indicator, with the increase recorded for October reflecting higher rents and housing prices that occurred earlier this year.

The acceleration of housing prices has slowed recently, and in many markets, so have rental increases, hinting that the shelter index will drop in the near future, thus taking further pressure off the overall rate of inflation.

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