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US annual inflation rate cools slightly to 7.7% in October Slowing US inflation rate raises hopes cost of living crisis may have peaked
(about 4 hours later)
Bureau of Labor Statistics data represents decrease from September but core inflation rate remains high Pound surges and stock markets rebound as US consumer price index drops from 8.2% to 7.7% in October
Prices of goods and services in the US were up 7.7% in October compared with the same time last year, a sign that inflation is slowly starting to cool after reaching decades-high records over the last few months. Stock markets rebounded and the pound surged on Thursday after the US reported a lower than expected inflation rate for October, fuelling hopes that this year’s cost of living crisis may have peaked.
The US Bureau of Labor Statistics reported on Thursday that in October, the consumer price index showed a 7.7% rise in prices over the last 12 months, a 0.5 percentage-point decrease from September, which saw a rate of 8.2%. The October inflation rate is the lowest since January, when rates rose to 7.5%. Shares on the London exchange jumped after US inflation dropped from 8.2% in September to 7.7% in October with the FTSE 100 index of large companies rising 1%, while the smaller, domestically focused FTSE 250 index gained 3.8%.
Along with the slight cooling in the overall inflation rate, the core inflation rate, which excludes the volatile energy and food sectors, also showed a small tempering off, reaching 6.3% – a small increase compared to the core inflation rate last month. In the US, Wall Street was on track for its best day since April 2020, with the S&P 500 index jumping 4% and the tech-focused Nasdaq surging 5.5%.
The rise in prices can largely be attributed to the continuing rise in housing prices, which rose 6.9% over the last year. And while gas prices have been decreasing month-by-month, gas prices rose 4% over the last month in October, the first monthly increase since June. Gas prices have overall risen 17.5% over the last year. The lower than expected US inflation rate raised the prospects of a shallower recession next year across the industrialised world and increased the demand for government debt, sending bond prices higher and interest rates lower.
Multiple sectors saw decreases in prices, including used cars and trucks, apparel and medical care services. The price of food has been rising more slowly than in previous months, increasing 0.6% from September to October, and rising 10.9% over the last 12 months. The yield, or interest rate, on 10-year UK government bonds dropped by 20 basis points to 3.25%, the lowest since just before September’s mini-budget.
US stock futures quickly rose after the report’s release, showing Wall Street’s hopes that October’s rate signals a downward trend for inflation. The Nasdaq rose 5% ,while the S&P 500 and the Dow jumped 3.5% and 2.8 respectively. Analysts said the dip in inflation meant the US Federal Reserve could avoid increasing interest rates by as much as feared. The Bank of England’s peak interest rate was also likely to be lower over the next few months, potentially cutting short what had been expected to be a long recession in the UK.
While October’s inflation rate is slightly lower than analysts expected, it is still much higher than the 2% target rate that the Federal Reserve has been trying to reach. Those improved economic measures potentially mean the chancellor, Jeremy Hunt, has a bit more wriggle room when finalising the tax rises and spending cuts expected in his autumn statement next week.
The Fed, led by Jerome Powell and on a mission to temper inflation, has been raising interest rates since March after rates sat still early in the pandemic. Last week, the Fed increased rates for the sixth time, to 3.75% to 4%, making borrowing money for loans such as credit card use and mortgages more costly. Bond yields also fell across Europe as investors agreed the pressure on the European Central Bank to increase rates substantially had eased.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said: “The US and the UK have a similar inflation problem.
“So the news today that US inflation pressures appear to be easing has boosted hopes that UK inflation pressures will ease too.”
He added that these global developments – lower inflation and higher growth – would reduce the size of the UK’s fiscal hole, though most likely not in time for next week’s autumn statement.
The Office for Budget Responsibility (OBR), which will produce independent forecasts for the chancellor to coincide with the autumn statement, is expected to base its predictions on an average interest rate for government bonds over recent months.
“But if sustained, it would mean the public finances look healthier for the budget in the spring,” Dales said.
The US Bureau of Labor Statistics reported on Thursday that in October, annual inflation as measured by the consumer price index fell to 7.7% – the lowest since January, when it rose to 7.5%.”
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Along with the slight cooling in the overall inflation rate, the core inflation rate, which excludes the volatile energy and food sectors, halved month-on-month to 0.3%.
The rise in prices can largely be attributed to the continuing increase in US housing prices, which rose 6.9% over the last year. And while gasoline prices have been decreasing month by month, they rose 4% in October, the first monthly increase since June. Gas prices have overall risen 17.5% over the last year.
Multiple sectors recorded decreases in prices, including used cars and trucks, clothing and medical care services. The price of food has been rising more slowly than in previous months, up 0.6% from September to October, and rising 10.9% over the last 12 months.
Energy prices have remained lower in the US than other parts of the world mainly due to its increasing self-sufficiency in gas and oil and a sharp rise in renewable energy.
Gas prices have fallen steeply on international markets, but European countries are unlikely to benefit until long-term contracts lasting up to a year unwind.
The Fed, led by Jerome Powell and on a mission to temper inflation, has been raising interest rates since March after rates sat still early in the pandemic. Last week, the Fed increased rates for the sixth time, to between 3.75% and 4%, making borrowing money for loans such as credit card use and mortgages more costly.
Powell said the Fed would slow rate rises at some point but it was still “very premature to think about pausing”.Powell said the Fed would slow rate rises at some point but it was still “very premature to think about pausing”.
In an interview with Reuters on Wednesday, the Richmond Federal Reserve chair, Thomas Barkin, said it seemed the US was “on the back end” of inflation, but the Fed would determine how much more interest rates needed to rise according to “how malleable” inflation would be. The Bank of England governor, Andrew Bailey, has signalled a slowing of recent hikes in interest rates after raising the cost of borrowing to 3%, indicating the UK is already nearing a peak.
“That is a question we are trying to figure out,” he said. The central bank said earlier this month it expected the UK to have its longest recession on record should interest rates soar to 5%, as financial markets expected at the time.
The October inflation numbers come two days after the midterm elections. Polls and surveys have shown that the economy, specifically rising prices, were top of mind as voters headed to the polls. Lower than previously expected interest rates would allow more businesses to survive and fewer mortgage buyers to hand back the keys to their homes, limiting the impact on the property market and the wider economy.
Republicans blamed Democrats for inflation, though election results ultimately showed Democrats had performed more strongly than expected.