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Federal Reserve’s preferred inflation gauge shows price pressures continuing to cool

Thursday’s report from the Commerce Department said prices were unchanged from September to October, down from a 0.4 percent rise the previous month.ALYSSA SCHUKAR/NYT

WASHINGTON — The Federal Reserve’s preferred inflation measure cooled last month, the latest sign that price pressures are waning in the face of high interest rates and moderating economic growth.

Thursday’s report from the Commerce Department said prices were unchanged from September to October, down from a 0.4 percent rise the previous month. Compared with a year ago, consumer prices rose 3 percent in October, below the 3.4 percent annual rate in September. That was the lowest year-over-year inflation rate in more than 2½ years.

Excluding volatile food and energy costs, increases in so-called core prices also slowed. They rose just 0.2 percent from September to October, down from a 0.3 percent increase the previous month. Core prices rose 3.5 percent in October from a year earlier, below the 3.7 percent year-over-year increase in September. Economists closely track core prices, which are thought to provide a good sign of inflation’s likely future path.

With inflation easing, the Fed is expected to keep its key benchmark rate unchanged when it next meets in two weeks. The latest figures also suggest that inflation will fall short of the Fed’s own projected levels for the final three months of 2023.

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In September, the Fed’s policymakers had predicted that inflation would average 3.3 percent in the October-December quarter. Prices are now on track to rise by less than that, raising the likelihood that Fed officials will see no need to further raise interest rates.

“They’ve got to be encouraged by this data,” Vincent Reinhart, chief economist at Dreyfus & Mellon and a former Fed economist, said of the central bank’s policymakers. “It is a nice trend down in core inflation. Under the hood, there is a slowing that suggests they’re making progress.”

In the past six months, core inflation has risen at just a 2.5 percent annual rate, not far above the Fed’s 2 perccent target, and down sharply from a year earlier, when it was 5.1 percent.

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A big drop in gas prices helped slow inflation last month. From September to October, the price of gas tumbled 4.9 percent. Prices at the pump have fallen further this month, to a national average of $3.25 a gallon Thursday, according to AAA.

Grocery prices, though, edged up 0.2 percent last month and were 2.3 percent above their average costs 12 months earlier. Those price increases, though smaller than they were last year, are still faster than was typically true before the pandemic.

Some individual grocery items rose sharply last month: Beef jumped 1.2 percent from September to October. Milk and processed fruits and vegetables rose 1 percent. Grocery prices overall are up 23 percent from their pre-pandemic level.

Still, Americans ramped up their spending last month, though at a modest pace. Consumer spending increased 0.2 percent in October, the report showed, a smaller gain than some big increases in the spring and summer.

But a moderating pace of spending, slowed by high borrowing costs, should cool the economy and help further ease inflation. On Wednesday, the government reported that American consumers spent enough to help drive the economy to a brisk 5.2 percent annual pace from July through September. Growth is expected to slow, though, to about a 1.5 percent pace in the final three months of the year.

Spending fell sharply last month on large factory goods — cars, furniture, and appliances, for example — which are often bought on credit. The declines in spending on those items suggests that the Fed’s rate increases are discouraging purchases in some areas. This trend could force businesses to keep price increases on hold or even cut prices to support sales.

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According to the Fed’s preferred gauge reported Thursday, inflation peaked at 7.1 percent in June 2022. The central bank’s rate rate hikes have elevated the costs of mortgages, auto loans and other forms of consumer borrowing as well as business loans. The Fed’s goal in tightening credit has been to slow borrowing and spending and slow price increases.

Even as inflation has cooled, overall prices remain much higher than they were before the pandemic erupted in February 2020, leaving many Americans with a gloomy outlook on the economy. Consumer prices are still about 19 percent higher than they were right before the pandemic struck. Most Americans’ wages have risen slightly more than that. But inflation-adjusted wages haven’t increased as quickly as they did before the pandemic.

The US inflation gauge that was issued Thursday, called the personal consumption expenditures price index, is separate from the government’s better-known consumer price index. The government reported earlier this month that the CPI rose 3.2 percent in October from 12 months earlier.

The Fed prefers the PCE index in part because it accounts for changes in how people shop when inflation jumps — when, for example, consumers shift away from pricey national brands in favor of cheaper store brands.

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