Inflation moderates to 3.2% in October

Shelter prices dropped from the prior month but much economic uncertainty remains

Consumer prices were up 3.2% in October from a year earlier, down from 3.7% in September and slightly slower than economists’ expectations. “Core” prices, excluding food and energy, were up 4.0% in October, the smallest 12-month change since the period ending in September 2021.

However, the index for shelter continued to climb in October by 0.3%, offsetting a decline in gasoline prices and resulting in the seasonally adjusted index being unchanged from September.

The index for shelter increased 0.3% month over month and 6.7% year over year, continuing its slow deceleration. Shelter inflation typically lags observed prices by approximately six to twelve months.

“Shelter inflation has been coming down slowly since the summer, as new residential construction activity ramped up in 2023,” Lisa Sturtevant, chief economist for Bright MLS, said in a statement. “But permits for new construction are lower, which means that the boom in supply that has brought rents down in some markets will likely slow in 2024, which could put upward pressure on rents again.” As a point of reference, annual rent growth was at 10% one year ago, while today it’s at 3%, said First American economist Ksenia Potapov.

The longer inflation stays elevated, the more customers expect inflation to remain high.

“And if consumers reset their expectations for inflation to be at 3 or 3.5% it will be harder and harder for the Fed to bring inflation down,” Sturtevant said.

The inflation data comes on the heels of a cooler October jobs report. In comparison, the CPI rose 3.7% in September and 3.7% in August.

This easing of inflation is good news for investors who were counting on a strong report today to avoid an additional rate hike at the Federal Open Market Committee’s meeting on Dec. 12-13. On Tuesday, traders priced in a nearly 85.7% chance the Fed will hold interest rates steady in December, according to the CME Group’s FedWatch tool.

“The interest rate rises should be over, and the Fed will have to consider cutting interest rates seriously,” National Association of Realtors Chief Economist Lawrence Yun said in a statement. “In the meantime, the bond market is reacting as if the Fed will be cutting interest rates next year. Mortgage rates look to head towards 7% in a few months and into the 6% range by the spring of 2024.”

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