Prices for goods and services in the United States rose 7.7% during the 12-month period ending in October, the lowest annualized rate since January, leading to speculation that the efforts of the Federal Reserve to tame inflation through interest rate hikes may be bearing fruit.
According to data released by the Bureau of Labor Statistics, the Consumer Price Index (CPI) for all urban consumers rose by 0.4% month over month, which was enough to lower the annualized rate significantly from last month’s 8.2% figure.
Stripping volatile food and energy prices out of the measurement — something economists believe presents a truer picture of the overall direction of prices in the U.S. — had prices rising by just 0.3% in October, significantly slower than the 0.6% measured a month before.
Rising prices in the U.S. have mirrored inflation across many countries in the wake of the lockdowns caused by the COVID-19 pandemic. According to the International Monetary Fund, the U.S. inflation rate is well below the world average of 8.8% for the year ending in October, though somewhat higher than the 7.2% average for developed countries.
Beginning in March the Fed, the U.S. central bank, has been raising interest rates as part of its effort to bring inflation under control. It has moved aggressively at times, hiking rates by as much as 75 “basis points” — three-quarters of a percentage point — at a time.
The aim is to make saving money more attractive and borrowing more expensive, thereby reducing the amount of money flowing through the U.S. economy, Carola Binder, an associate professor of economics at Haverford College and a senior affiliate scholar at George Mason University’s Mercatus Center, told VOA.
“They want to reduce how much people are trying to spend,” Binder said. “With fewer people trying to buy goods, inflation will go down.”
Binder said Thursday’s report could be taken as evidence suggesting that the Fed’s approach might be working.
“This CPI report is being interpreted as really good news,” she said. “The stock market rose, and the markets are pricing in a lower chance that the Fed is going to have to do another 75-basis-point rate hike. There’s more chance than before that they’ll only need to do a 50-basis-point rate hike.”
While cautioning that it’s too early to say for sure, Binder added, “It looks like there’s at least the chance that this is some kind of inflection point.”
Kenneth N. Kuttner, a professor of economics at Williams College and a former assistant vice president of research at the Federal Reserve Bank of New York, told VOA that the Fed is looking not just to slow inflation but to prevent the broader public from beginning to believe that high inflation is the new normal for the U.S. economy. Even, he said, at the risk of sparking a brief recession.
The Fed, he said, “needs to act with sufficient decisiveness to make sure that no cycle of self-fulfilling expectations takes hold. … Raising rates will contribute to breaking the inflationary mindset. But of course, they’re obviously very concerned about overshooting and slamming on the brakes too hard.”
He added, “If they overshoot, then you’re going to get a much sharper recession and larger uptick in the unemployment rates.”
Fed officials speak
In public remarks Friday, two Fed presidents indicated they expect the central bank to begin decelerating the pace of rate increases soon.
“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,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said in a speech Thursday.
He added, “[I]f we have to, we can always tighten further, based on the data.”
“I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving,” said Lorie Logan, president of the Federal Reserve Bank of Dallas, also on Thursday.
Neither Harker nor Logan is currently on the Federal Open Market Committee, which sets interest rates, but both will be voting members beginning in January.
The CPI announcement came just a day after American voters, many deeply distressed by rising prices, voted in federal midterm elections. Although the final vote counts remain incomplete, voters do not appear to have punished the administration of President Joseph Biden and his Democratic Party too severely. While Democrats may still lose control of one or both houses of Congress, a projected rout of the party did not materialize.
In a statement released Thursday morning, Biden acknowledged that inflation remains higher than desirable. The Fed has historically aimed for a 2% inflation rate. However, Biden claimed the Labor Department’s data demonstrates progress.
“Today’s report shows that we are making progress on bringing inflation down, without giving up all of the progress we have made on economic growth and job creation,” he said. “My economic plan is showing results, and the American people can see that we are facing global economic challenges from a position of strength.”
Republican leaders in Congress did not immediately react to the inflation news, but the Republican National Committee used its Twitter feed to call attention to the continued rise in prices, writing, “October’s Consumer Price Index soared by 7.7 percent compared to last year, remaining excessively high.”