United States: Inflation Falls on Lower Gas Prices

The all items index recorded its smallest increase since July 2022 in October. This was largely due to energy prices, which fell 2.5% on the back of a 5.0% drop in gasoline prices. Fuel oil prices were also down 0.8%. And it looks like energy prices have continued to fall in November, which will help keep the CPI in check again this month. Food prices edged up 0.3% in October—the fastest pace since February and partially offsetting lower energy prices in the headline calculation.

The index for all items less food and energy posted its smallest monthly increase since July. Prices for goods excluding energy and food continue to drive the index lower. They were down 0.1%, their fifth straight monthly decline. Prices for motor vehicles were also lower in October (-0.1% for new vehicles and -0.8% for used cars).

But this time, higher prices for services excluding energy did less to offset lower goods prices as they were up 0.3% in October, their smallest gain since June and their second-smallest increase since September 2021. Shelter costs were up “a mere” 0.3%—half their 0.6% September advance. Rent and owners’ equivalent rent slowed, with lodging away from home down 2.5%. Meanwhile some medical care services posted smaller price gains, and airfares were down 0.9%.

The prices of goods and services continue to be on divergent paths in the US, but that gap appears to be narrowing. We need to see goods prices continue to fall over the coming months and quarters, and that’s what we expect based on recent data on supply chain pressures, on prices in China and on manufacturing activity (ISM Manufacturing prints). On the services side, we also need to see shelter costs keep letting up. Slower wage growth would also help. It will take all of these things happening and inflation inching closer to the 2% target for us to say with more certainty that the inflation fight will be won.

Today's drop in headline inflation and slight decline in core inflation are good news that will reassure Fed officials that they made the right call by holding rates steady at their recent meetings. But inflationary pressures will need to continue to ease up. If they do, the Fed’s next moves could be rate cuts—but probably not until next summer.