Will October's inflation increase slow the pace of interest rate cuts?

Inflation increased to 2.6% in October, rising modestly from the previous month, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).

In October, inflation was above the annual inflation rate of 2.4% in September, and it increased 0.2% on a monthly basis, according to BLS. The cost of housing was the most significant contributor to the monthly increase in October, accounting for over half of the rise of the monthly all-items index. The price of food also increased by 0.2% in October. Energy prices remained unchanged after dropping 1.9% in the previous months. These lower prices are helping to 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 mount, it may influence the Federal Reserve's pace of interest rate cuts. Last week, the Fed announced a highly anticipated quarter of a percentage point cut, lowering interest rates to between 4.5% and 4.75%. However, inflation has moderated substantially over the last two years, from a peak of 7% to 2.6%. Fed Chair Jerome Powell said the Fed remains committed to maintaining the U.S. economy's strength by supporting maximum employment and returning inflation to its 2% goal. 

"Markets have dialed back expectations for another cut and are currently pricing in somewhat lower ~60% odds of that outcome," Realtor.com Chief Economist Danielle Hale said. "The November jobs report, due out in early December, is likely to be an important input in that decision alongside the latest inflation reading."

For now, moderate inflation and the Fed's dialing back of interest rates are likely to give consumers space to spend as the holiday season approaches, according to Gabe Abshire, CEO of Move Concierge. 

"The average American consumer is still feeling the pinch of inflation, but not to the same extent as last year when it greatly hampered monthly household spending," Abshire said. "As we move into the holiday spending season, we anticipate strong retail sales and a slow winter homebuying season."

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Rate cut pace may slow

Bringing inflation down to the 2% target rate is likely to be the biggest challenge, according to Jim Baird, chief investment officer with Plante Moran Financial Advisors. Baird said that adding to the challenge may be how President-elect Donald Trump's administration's trade and fiscal policy plays out and the slow pace of cooling in the cost of housing and other services. These factors combined could lead to some volatility in inflation.

While it's unlikely that the Fed would reverse course on its interest rate cuts, they could slow down the timing and pace of rate cuts next year. The Fed said in September it anticipated that if the economy evolves as expected, the Fed could dial back the federal funds rate to 4.4% at the end of this year and 3.4% by the end of 2025. 

"With consecutive rate cuts now in the Fed's back pocket, there is a broad sense that officials can view further easing through a more critical lens, particularly given the sustained positive momentum in GDP growth," Baird said. "The economy has continued to grow at a solid pace, lifted by a resurgence in consumption, raising doubts about the ability of or need for short-term rates to be slashed as aggressively as the Fed's projections have suggested."

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Car insurance prices ease

Car insurance decreased 0.1% in October and the rate of annual increase slowed for a sixth straight month, according to today's CPI report. That should be welcome news for drivers who have seen insurance costs soar over the last two years. 

Insurance costs are still high, but the signs are there that the worst may be over, according to Josh Damico, vice president for insurance operations at Jerry. Damico said that claims-related costs that have driven insurers' rate increases have stalled or fallen in recent months. Used car prices are down 18% from their peak in early 2022, while motor vehicle parts and equipment rose only 2.3% annually in October after flatlining for most of 2024. 

"With claims-related cost pressures easing, many insurers are pausing rate hikes while others are unwinding some of their recent increases," Damico said. "The rise in repair costs is a bit concerning, but the carriers feel good about vehicle prices and are looking to sell more policies."

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