Consumer prices were unchanged from the prior month in October as a drop in oil prices dragged down headline inflation while “core” inflation rose at the slowest annual pace since September 2021, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.

The Consumer Price Index (CPI) showed prices were flat over last month and rose 3.2% over the prior year in October, a deceleration from September’s 0.4% monthly increase and 3.7% annual gain in prices.

Economists had expected prices to increase 0.1% month-over-month and 3.3% year-over-year, according to data from Bloomberg.

As expected, lower energy costs held the headline figures to a smaller gain with energy prices dropping 2.5% month-over-month, driven by lower gas prices, which dropped 5% during the month of October.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in October climbed 4.0% over last year — lower than the annual increase seen in September, according to Bloomberg data. Monthly core prices climbed 0.2%, also lower than September’s monthly rise.

Economists had expected core prices to rise 0.3% over the prior month and 4.1% over the prior year.

Other notable call-outs from the inflation print include the shelter index, which rose 6.7% on an unadjusted, annual basis — the slowest increase in a year.

The shelter index was the largest factor in the monthly increase in core inflation, increasing 0.3% month-over-month but still slower than September’s 0.6% monthly jump.

Within core inflation, rent increases remained elevated but continued to show signs of easing.

The index for rent and owners’ equivalent rent rose 0.5% and 0.4% on a monthly basis, respectively. Owners’ equivalent rent is the hypothetical rent a homeowner would pay for the same home.

Other indexes that rose in October included motor vehicle insurance, which increased 1.9% after rising 1.3% the prior month. The indexes for recreation, personal care, and apparel also increased in October.

The indexes for used cars and trucks, new vehicles, airline fares, and household furnishings and operations were among those that decreased over the month. The monthly prices for used cars and trucks dropped another 0.8% in October after prices fell 2.5% in September.

The food index increased 3.3% in October over the last year, with food prices rising 0.3% from September to October. The index for food at home increased 0.3% over the month after rising just 0.1% in September.

Apple prices dropped 7.9% month-over-month — the biggest drop since 1987.

Egg prices, however, increased 0.1% month-over-month after rising 0.9% in September. Prices had fallen 2.5% in August and 2.2% in July.

To hike or not to hike?

US stocks soared in early trading following the release of the data. The 10-year Treasury yield (^TNX) dropped 18 basis points to trade near 4.45%, while the 30-year Treasury yield (^TYX) declined roughly 13 basis points to 4.61%.

Inflation has remained significantly above the Federal Reserve’s 2% target, although investors are largely betting the Federal Reserve won’t raise rates in December — especially given Fed Chair Jerome Powell’s rhetoric at the prior meeting.

“Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more,” Powell said earlier this month after the central bank held rates steady for a second consecutive meeting.

Immediately following the release of the data, markets were pricing in a nearly 100% chance the Federal Reserve keeps rates unchanged in December, according to data from the CME Group.

“October CPI was soft on the services side, and a November print like this would not meet the bar we previously set for an additional hike in December,” wrote Ellen Zentner, chief economist at Morgan Stanley. “We think soft inflation and still tight financial conditions will keep the Fed on hold.”

Eugenio Aleman, chief economist at Raymond James, agreed, writing, “This was a positive report for the Federal Reserve and for markets.”

Aleman called out the monthly deceleration in shelter prices as a key highlight, adding: “This report could also be a signal that the US economy’s growth rate has downshifted from the breakneck pace it reported during the third quarter of this year.”

Still, that doesn’t mean the central bank can declare a win over inflation just yet.

Outside of shelter, Oxford Economics lead US economist Michael Pearce warned, “There are signs that services inflation will prove sticky, reflecting tight labor market conditions, with the prospect of a return to the 2% target still some way off.”

“Overall the October CPI report gives Fed officials more confidence that inflation is on a firm downward trajectory, which should stay their hand on any additional rate hikes,” Pearce said. “However, the disinflation process still has some way to go, and the path to weaker services inflation depends on a continued cooling in labor market conditions, so it will still be a long time before the Fed is able to think about lowering interest rates.”