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Inflation grew at its slowest since January last month as Federal Reserve rate hikes target sectors of the economy to dampen demand and tame rising prices — a potentially promising sign for consumers as officials gauge when to hit the brakes aggressive tightening campaign.

Important facts

Consumer prices rose 7.7% on an annual basis — less than the 7.9% peak economists had been expecting after September’s 8.2% reading.

Prices also performed better-than-expected month-on-month, rising 0.4% from September versus economists’ forecast of 0.6%, according to data released by the Labor Department on Thursday.

In emailed comments, First Citizens Bank economist Phillip Neuhart called the report “welcome news” but noted that inflation “remains at historically high levels,” adding that the Fed is adjusting monetary policy tightening further “until it is clear that inflation is on a sustained downward trend.” ; Although annual inflation in October marked the smallest increase since January, it is still almost four times the Fed’s historic target of 2%.

“If that’s an improvement, then we’ve set the bar very low,” says Greg McBride, Bankrate’s chief financial analyst, adding that the “ubiquity” of price increases “remains problematic” and suggesting consumers need goods and services – namely housing, food and energy – “still see large and steady increases”.

While prices for used cars, clothing and airline tickets fell over the past month, housing (or rent) prices contributed more than half of the rise in headline inflation as petrol and food prices also rose, the government said.

Crucial quote

“Inflation has been getting much hotter for much longer than expected and we have yet to string together some kind of winning streak,” says McBride. “With additional reports on inflation . . . in the coming days and another CPI report ahead of the December Fed meeting, there is ample opportunity for further disappointment.”

key background

The Fed began raising rates as inflation hit a 40-year high in March, but expectations for the pace and depth of incoming rate hikes are muted amid dogged share price gains and criticism that the central bank was too slow to start raising rates have waited a long time, become more aggressive. The hikes, which curb inflation by dampening consumer demand, have already hurt housing and stock markets: the S&P is down 22% this year and existing home sales are down more than 20%. However, the job market and corporate earnings have remained broadly resilient – justifying the Fed’s aggressive policy to combat inflation, even though parts of the economy are already struggling.

What to look out for

The Fed has only one policy meeting this year, ending on December 5th. Despite Fed Chair Powell arguing for the pace of tightening to be slower after the last hike in July, policymakers changed their tune after the August and September CPI reports both rose more-than-expected, suggesting the central bank is still doing more must before it curbs the rising prices. Goldman Sachs forecasts the central bank will hike to a 5% peak interest rate next year — dwarfing the 4.9% forecast the Fed released in September and well above its December forecast, which provide for a top interest rate of 3.1%.

Further reading

Labor market is ‘really strong’ but showing signs of ‘destruction’: Here’s how Fed hikes have changed attitudes (Forbes)

Fed Chair Jerome Powell – haunted by the ghost of Paul Volcker – could take a toll on the economy (Forbes)