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Hot U.S. inflation is cooling, key PCE price gauge shows

The numbers: A key gauge of U.S. inflation rose a modest 0.3% in October, adding another piece of evidence that points to slowly easing price pressures.

The increase in the personal consumption expenditures index was a touch below Wall Street’s forecast.

The yearly rate of inflation slowed to 6% in October from 6.2% in the prior month and a 40-year high of 7% last summer.

The PCE index is by the Federal Reserve as the best measure of inflation, especially the core guage that strips out volatile food and energy costs.

The core index rose 0.2% last month. Wall Street had forecast a 0.3% increase in the so-called core PCE index.

The core rate of inflation in the past 12 months slipped to 5% from 5.2%. It’s also down from a 40-year high of 5.4% last February.

“Core inflation often gives a more accurate indicator of where overall inflation is headed,” Fed Chairman Jerome Powell said in a speech on Wednesday.

Key details: The cost of gasoline rose in October, contributing to the increase in inflation.

Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.

They might substitute cheaper goods such as ground beef for more expensive ones like ribeye to keep costs down. Or buy no-name denims instead of more fashionable jeans.

The CPI showed inflation rising at a 7.7% yearly rate in October.

Big picture: The rate of inflation appears to receding, but only very slowly. The Fed is worried inflation could become more entrenched in the economy if it doesn’t come down faster.

“It will take substantially more evidence to give comfort that inflation is actually declining,” Powell said.

The central bank plans to keep raising U.S. interest rates to slow the economy enough to drive inflation lower. When consumers and businesses buy less, prices tend to fall.

The big question is whether the Fed can avoid a recession. The bank has never succeeded at reducing such high inflation without triggering a downturn.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.50%

and S&P 500
SPX,
+3.09%

were set to open higher in Thursday trades.

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