U.S. inflation is cooling faster than expected, a sign interest rate hikes might be done

October's inflation report came in shockingly mild, leading economists to wonder if America's long post-pandemic, high-prices nightmare has finally ended.

"The inflation fever has broken," is how Bill Adams, chief economist at Comerica Bank, declared it in his Tuesday note.

The consumer price index (CPI) rose 3.2% year-over-year in October, down from 3.7% in September, according to data the U.S. Bureau of Labor Statistics released Tuesday. And while many consumers are still feeling the effects of steep costs — particularly for services from car repairs to personal grooming — the end of the Fed's involvement could be in sight.

"This is good news," said Louis Johnston, an economics professor at the College of St. Benedict and St. John's University. "It continues the trend that the Federal Reserve wanted, which is to bring inflation down gradually."

The stock markets responded enthusiastically to the positive inflation news, with the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 all rising between 1.4% and 2.4% by Tuesday's market close.

A decline in energy prices, particularly gasoline, contributed to the slowdown. Food prices, though up slightly, showed signs of slowing. The 4% bump in "core" inflation, which excludes food and energy prices, was the lowest 12-month change since the period ending in September 2021.

"The concern with this report was that core inflation was maybe going to come in a little bit hotter than it did, and because core inflation actually continued to tick down a little bit, I think that's the underlying signal that's really important here," said Tyler Schipper, an associate economics professor at the University of St. Thomas.

Moderating housing costs are a key reason for that decline, he said, "and as long as that continues, I think a lot of the decreases in inflation are baked in."

Price increases in the Midwest are lower than in the nation as a whole, with a 2.9% bump from October 2022 to October 2023. The Twin Cities area has experienced even lower inflation, with a 2.2% increase year-over-year in September, the last month where data was available.

Still, prices aren't returning to pre-pandemic levels, and that can make it hard for consumers to see the shift. At Glasgow Automotive Services in St. Paul, service manager and tech Brandon Trondson said costs have risen for everything, from utilities to parts to payroll.

"I personally don't believe inflation has gone down at all," he said, "because all I'm seeing is everything keeps going up and up and up and up."

The CPI measures the change in prices consumers paid for goods and services. Price increases reached a 40-year high of 9.1% in June 2022, but the rate of inflation has fallen as the Federal Reserve has hiked interest rates to 5.25% to 5.5%. The Fed's goal is 2% inflation, the agreed-upon level to achieve both maximum employment and price stability.

Fed officials have signaled they intend to leave rates higher for longer as they work to rein in the economy. In remarks in Washington, D.C., on Thursday, Fed Chair Jerome Powell said he and his colleagues "expect that the process of getting inflation sustainably down to 2% has a long way to go."

"The Federal Open Market Committee [FOMC] is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance," he said. "We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes."

Scott Anderson, chief U.S. economist and managing director at BMO capital markets, said while "it's too early [for the Fed] to declare victory" against inflation, the latest CPI numbers will likely keep the FOMC from raising rates at its December meeting.

"We don't have any more rate hikes in our forecast," he said. "We expect them to start cutting rates in the third quarter of next year."

Though inflation was down overall in October, the picture was less linear up close: While airline fares dropped 13.2%, the cost of car insurance rose 19.2%; while fuel oil was down 21.4%, electricity was up 2.4%. And while shelter costs increased 6.7% year-over-year, the month-to-month jump slowed at just 0.3%.

"At some level, people who are giving excuses for inflation are running out of excuses. First, it was the supply chain, then it was war, then it was oil," said V.V. Chari, a University of Minnesota economics professor. "Much of the inflation that we have been seeing is in services, and even there, they used to blame it all on housing. This month's reading says it's not housing."

Labor costs drive inflation in services — ranging from rent to health care to haircuts — and prices have remained elevated even as job growth slows.

At Madison & Co. Salons in downtown Minneapolis, hair stylists rent chairs and set their own prices, which range from $42 to $72, said manager Norma Ransom. Though product prices have jumped, she said, the cost of a haircut hasn't risen dramatically as a result of inflation. Still, customers come in less regularly than before the pandemic.

"Instead of maybe four weeks, they'll stretch it to maybe five or six or more," Ransom said.

At Latuff Brothers Auto Body in St. Paul, demand for services has spiked as drivers have flocked back to the road, but the cost of those services is up, too, said marketing manager Jamison Randall. The combination of higher labor and materials costs has meant raising prices and negotiating rates with the insurers that pay for repairs, he said.

"In general," Randall said, "we just are looking at what we need to do to remain a viable business."

This report includes information from the Associated Press.