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US inflation continued its downward trend in October, falling for the first time in three months.
Consumer prices rose 3.2 percent year-on-year in October, compared with an annual rate of 3.7 percent in September. The annual increase was slightly smaller than economists had predicted, and prices remained unchanged month to month.
The central bank held its key interest rate steady at a 22-year high earlier this month and investors are increasingly confident that rates have peaked.
Futures markets on Monday afternoon were pricing in a 13 percent chance of another rate hike at the Fed’s next interest rate meeting in mid-December.
Core inflation – which ignores volatile food and energy prices – was also slightly weaker than economists had predicted, falling to 4.0 percent from 4.1 percent year-on-year. Core inflation rose 0.2 percent month-on-month.
Fed Chairman Jay Powell stressed last week that policymakers would not be “misled by a few good months of data” and that the central bank could tighten monetary policy further if necessary, although officials had little intention of doing so have shown that interest rates should immediately be raised above the current range of 5.25-5.5 percent.
Stronger-than-expected gross domestic product growth has stoked fears that the slowdown in inflation could stall, but Powell said last week that he and his colleagues had expected economic growth to slow.
Instead of another rate hike, the Fed is increasingly expected to push the timing of rate cuts further into 2024 if consumer prices remain stubbornly high.
One potential problem is that greater confidence in the economy could push down government bond yields, which in turn could lower the cost of capital for companies and thereby trigger a further rise in inflation.
Tightening financial conditions in stock and bond markets earlier this fall was welcomed by Fed officials who said they could negate the need for another rate hike. But that optimism buoyed markets, leading to a renewed easing of conditions and prompting some investors to warn of an “infinite loop.”
“We will need continued tight financial conditions to bring inflation to 2 percent in a timely and sustained manner,” said Lorie Logan, president of the Dallas Fed and a voting member on the Federal Open Market Committee. said last week.