Housing costs remain an important inflation factor. (iStock)
Inflation rose to 2.6% in October, a modest increase from the previous month, according to the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS).
In October, inflation was above September’s annual inflation rate of 2.4% and rose 0.2% month over month, according to BLS. Housing costs were the largest contributor to the monthly increase in October, accounting for more than half of the increase in the monthly all-items index. The price of food also rose by 0.2% in October. Energy prices remained unchanged, after a decline of 1.9% in previous months. These lower prices help bring down the overall cost of goods and services, offsetting increases in other parts of the economy.
If the pace of price increases continues to accelerate, it could impact the pace of interest rate cuts by the Federal Reserve. Last week, the Fed announced a long-awaited cut of a quarter of a percentage point, lowering interest rates to between 4.5% and 4.75%. However, inflation has declined significantly over the past two years, from a peak of 7% to 2.6%. Fed Chairman Jerome Powell said the Fed remains committed to maintaining the strength of the U.S. economy by supporting maximum employment and returning inflation to the 2% target.
“Markets have dialed back expectations for another downgrade and are currently pricing in a slightly lower ~60% chance of that outcome,” said Danielle Hale, chief economist at Realtor.com. “The November jobs report, which will be released in early December, will likely be an important input for that decision, in addition to the latest inflation figures.”
For now, subdued inflation and the Fed’s rollback of interest rates will likely give consumers room to spend as the holidays approach, said Gabe Abshire, CEO of Move Concierge.
“The average American consumer is still feeling the pressure of inflation, but not to the same degree as last year, when it severely hampered household monthly spending,” Abshire said. “As we enter the holiday season, we expect strong retail sales and a slow winter homebuying season.”
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The pace of interest rate cuts may slow
Bringing inflation back to the 2% target will likely be the biggest challenge, according to Jim Baird, chief investment officer at Plante Moran Financial Advisors. Baird said the challenge may be exacerbated by the way the newly-elected Donald Trump administration’s trade and fiscal policies are evolving and the slow pace of cooling in the costs of housing and other services. These factors together could lead to some volatility in inflation.
While the Fed is unlikely to change the course of its rate cuts, they could slow the timing and pace of rate cuts next year. The Fed said in September that if the economy develops as expected, the Fed could cut the fed funds rate to 4.4% by the end of this year and to 3.4% by the end of 2025.
“With the Fed now having successive rate cuts in its back pocket, there is broad sentiment that officials may view further easing through a more critical lens, especially given the continued positive momentum in GDP growth,” Baird said. “The economy has continued to grow at a solid pace, boosted by a revival in consumption, raising questions about the ability or need for as aggressive a cut in short-term interest rates as the Fed’s projections suggest.”
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Car insurance prices are going down
Auto insurance fell 0.1% in October, according to today’s CPI report, with the annual rate of increase slowing for the sixth straight month. That should be welcome news for motorists who have seen insurance costs skyrocket over the past two years.
Insurance costs are still high, but there are signs that the worst is over, said Josh Damico, vice president of insurance operations at Jerry. Damico said claims-related costs that have driven insurers’ rate increases have stalled or fallen in recent months. Used car prices fell 18% from their peak in early 2022, while motor vehicle parts and equipment rose just 2.3% annually in October, after flatlining for most of 2024.
“As claims-related cost pressures ease, many insurers are pausing rate increases, while others are reversing some of their recent increases,” Damico said. “The increase in repair costs is a bit concerning, but carriers are feeling good about vehicle prices and want to sell more policies.”
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