The Bureau of Labor Statistics reported on Thursday that the consumer price index rose 7.7% from a year ago in October, compared with economists' expectations of an 8% increase, according to financial data firm FactSet Research Systems.
Excluding the volatile food and energy sectors, the core CPI rose by an annualized 6.3% in October.
The overall 7.7% CPI figure for October was the smallest 12-month increase since January 2022, the BLS noted, and fell below the 8.2% annualized increase reported in September. In June, the annualized CPI figure was 9.1%, a 40-year high.
The Federal Reserve, which has been committed to keeping a lid on inflation, has raised the benchmark federal funds rate by 75 basis points at each of its last four consecutive meetings. The fed funds rate is now at a target range of 3.75%-4%, the highest such level since January 2008.
The central bank next meets on Dec. 13-14.
At the Nov. 2 meeting, the Fed stated that it "anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time" and that in determining the pace of future rate hikes the committee "will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
According to the CME Group's FedWatch tool, as of 9 a.m. EST Thursday, market participants' pricing of Fed Fund futures indicated there is an 80.6% probability that the Fed will increase rates by another 50 basis points at the December meeting, and only a 19.4% probability that the Fed will increase rates by 75 basis points.
Seamus Smyth, New York-based chief economist at Virtus Investment Partners, said by email that the October CPI data was "very clearly a better report than we've seen for a while."
"This is very much the type of report that gives the FOMC enough cover to step down the pace of hikes," he added.
The report suggests that the central bank is likely to boost rates by 50 basis points in December, "especially as growth looks to continue to slow," he added.
Virtus has $157 billion in assets under management.
Cheryl Smith, Boston-based portfolio manager and economist at Trillium Asset Management, said by email that the CPI report was "a big positive surprise" and that "equity and bond market reaction is very positive, but likely to fade over the day."
She added that the Fed "will not be able to ease until the overall inflation rate gets much closer to the Fed's 2% target … While welcome, these readings for October are not nearly enough for the Fed to believe that the battle is won."
Trillium has $4.1 billion in AUM.
John Luke Tyner, Fairhope, Ala.-based portfolio manager and fixed income analyst at Aptus Capital Advisors, said by email while this was an "encouraging report" it does not mean it will change Fed policy as inflation remains above its target.
"The report will probably cement a 50 (basis point) hike in December, as the Fed has expressed a desire for slowing unless we see a monster November jobs report/CPI report (on) December 13th," he said. "From here, we are encouraged by the slower than expected inflation but the biggest question from here is the peak (Fed Funds) rate, and unless we get several reports like this one, we think 5% remains a good estimate for the terminal (Fed Funds) rate."
Aptus has $3.6 billion in AUM.