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October Saw a Decrease in the Federal Reserve’s Preferred Inflation Measure

A key measure of inflation showed ongoing signs of slowing down in October, which is positive news for the Federal Reserve as officials assess whether they need to take further steps to counter rapid price increases.

The Personal Consumption Expenditures inflation measure, which the Fed refers to when indicating it targets 2 percent inflation on average over time, rose by 3 percent in the 12 months through October. This was down from 3.4 percent the previous month, and was in line with economist forecasts. Prices remained flat compared to the previous month.

After removing volatile food and fuel prices to get a clearer view of underlying price pressures, inflation increased by 3.5 percent over the year, a decrease from the previous 3.7 percent.

The most recent evidence that price increases are slowing down coincided with other positive news for Fed officials: Consumer spending is showing less strength. A measure of personal consumption increased by 0.2 percent from September, a slight deceleration from the previous month.

The report could provide important insights to Fed officials as they prepare for their final meeting of 2023, which is scheduled for Dec. 12-13. While investors widely anticipate policymakers to leave borrowing costs unchanged at the meeting, central bankers will release a fresh set of economic projections that could hint at their plans for future policy. Jerome H. Powell, the Fed chair, will also hold a news conference.

“They’re going to want to still stay cautious about declaring ‘Mission Accomplished’ too soon,” said Omair Sharif, founder of Inflation Insights. Still, “we’ve had a string of really good readings.”

Policymakers have been closely monitoring how both inflation and consumer spending develop as they assess how to proceed. They have already increased interest rates to a range of 5.25 to 5.5 percent, the highest level in over two decades. Given this, many officials have indicated that it may be time to pause and observe how policy plays out.

John C. Williams, the president of the Federal Reserve Bank of New York, hinted in a speech on Thursday that he anticipated inflation to moderate enough for the Fed to halt interest rate hikes now, although officials could further raise interest rates if the data surprised them.

“If price pressures and imbalances persist more than I expect, additional policy firming may be needed,” Mr. Williams said. He reiterated his assessment that the Fed is “at, or near, the peak level of the target range of the federal funds rate.”

The economy has been more resilient to those higher borrowing costs than many expected, which is one reason that the Fed has maintained a cautious stance. If strong demand allows companies to continue raising prices without losing customers, it could be more difficult to fully eliminate inflation.

However, recent indications that consumers and companies are finally becoming more cautious have been well-received at the Fed.

“I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand,” Christopher Waller, a Fed governor, stated this week. He added that “inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained.”

Mr. Sharif pointed out that the conversation on Wall Street had centered around when the first interest rate cut might take place, and the Fed’s upcoming economic projections should provide insight. Some of Mr. Waller’s remarks this week fueled speculation that cuts could happen earlier next year.

But “you don’t want to get too far ahead of your skis, for now,” Mr. Sharif said, noting that the data has improved in the past before deteriorating again. He doesn’t believe that the Fed will want to strongly discuss rate cuts until it has data for late 2023 and early 2024 in hand.

“I just think they’re going to want to stay a little bit cautious right now,” he said.

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