US inflation cools slightly in October to 7.7%

Stock markets rally as report offers Federal Reserve room to reduce scale of future interest-rate increases

US consumer inflation cooled to 7.7 per cent over the last 12 months, giving the Federal Reserve a path to east its interest-rate hikes over the coming months. EPA

US consumer inflation cooled slightly to 7.7 per cent over the past 12 months, easing pressure on households and offering the Federal Reserve room to slow the pace of its interest-rate hikes in the coming months.

The year-over-year gain was the smallest since January, the US Labour Department said on Thursday. Consumer inflation rose 0.4 per cent in October, the same increase as in September, the department reported.

So-called core inflation — which excludes food and energy prices — rose 6.3 per cent year-on-year.

The report showed signs of hopes that inflation in the US may have reached its peak from 9.1 per cent over the summer.

"Today’s report shows that we are making progress on bringing inflation down, without giving up all of the progress we have made on economic growth and job creation," President Joe Biden said in a statement.

Following Thursday's inflation data, The Dow Jones Industrial Average rose 749.97 points at the open. The S&P was up by 117.28 points and the Nasdaq Composite saw a bump of 435.98 points.

While the deceleration in core prices is welcome news, inflation remains high. Fed Chair Jerome Powell, who said earlier this month that officials need to see a consistent pattern of weaker monthly inflation, also indicated interest rates will likely peak higher than policymakers previously envisioned.

The Fed has raised its interest rates six times this year as it seeks to tamp down on the soaring costs of goods in the US. The central bank's latest interest-rate hike raised its short-term rate between 3.75 per cent to 4 per cent, its highest in 14 years.

Following Thursday's report, traders expect the Fed to raise its short-term rate by 50 basis points when it next meets in December, the CME Group's FedWatch tool shows.

Declines in the price gauges for medical care services and used vehicles restrained the core measure of inflation.

Higher shelter costs contributed to more than half of the increase in overall Consumer Price Index.

Even with prices cooling last month, the Fed is expected to continue issuing interest-rate hikes. In its most recent meeting, however, it noted that it would consider “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” when making future decisions.

Former Treasury officials, bankers and billionaires have warned that raising borrowing rates for expenses such as mortgages and car purchases will plunge the US economy into a recession.

Mr hit back against recession fears while speaking to reporters on Wednesday.

“We’re not anywhere near a recession right now, in terms of the growth,” Mr Biden said.

“I think we can have what most economists call a soft landing, and I’m convinced that we’re going to be able to gradually bring down prices so that they in fact, end up with us not having to move into recession.”

The Fed's actions have had a profound effect on the housing market. Mortgage rates in the US topped 7 per cent for the first time in more than 20 years, mortgage buyer Freddie Mac reported last week. As a result, home sales in the country have dipped for eight consecutive months.

Another inflation report and jobs report will be released before the Federal Open Market Committee's final meeting this year.