Price growth is slowing, but high inflation could still persist through most of 2024 and beyond.
Inflation dropped from a year-over-year rate of 3.7% to 3.2% in October, according to the latest consumer price index report released by the U.S. Bureau of Labor Statistics Tuesday morning. The CPI is a basket of goods and services that Americans typically buy.
While the slowdown is good news for consumers, that dip is largely based on a momentary downturn in gas prices.
Perhaps more importantly, core inflation — which excludes volatile food and energy prices — dropped from 0.3% in September to 0.2% in October, which was lower than expected.
That's slowed from the month-over-month increases of 0.4% and 0.5% in first few months of 2023. At an annualized rate of 2.4%, core inflation is trending closer to the Federal Reserve's overall year-over-year target rate of 2%.
While encouraging, core inflation will need to "weaken consistently over the next three to six months to support the notion that core inflation's pace is headed for a sustainable 2% pace," says Kurt Rankin, senior economist at PNC Financial Services Group.
"We still have a long way to go" before core inflation is under control, Greg McBride, chief financial analyst at Bankrate, tells CNBC Make It.
When will inflation go back down to normal?
Fed officials don't expect inflation to reach 2% until 2026, based on the most recent projections released in September.
And core inflation posting monthly increases of 0.2% or less will be a "big ask" over the next few months, considering the "holiday shopping season and its accompanying leisure and hospitality spending are underway," says Rankin.
Even so, PNC expects core inflation to eventually subside next year, with overall inflation dropping to 2% by July 2024. This forecast reflects expectations of a weakening labor market and growing consumer debt.
Similarly, a recent survey of professional forecasters has inflation pegged at 2.5% by summer 2024.
Many analysts also think the central bank is done with interest rate hikes, at least for the rest of the year. That's largely based on recent signs that the economy is cooling, with a weaker-than-expected October jobs report and an uptick in unemployment.
The probability that interest rates will remain untouched before 2024 is now 85.7%, according to the CME FedWatch Tool, a real-time tracker that measures rate hike probabilities.
"If you look out the windshield, it's not as bright and sunny as what you see in the rearview mirror," says McBride, referring to the economy. "There are certainly more clouds on the horizon."
Of course, "we're always on the verge of a slowdown — for a year, it seems," says McBride. But if the economy remains as resilient as it has been, inflation could stay higher for longer, he says.
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