After some progress slowing inflation down to 2.4% over the last few months, the Bureau of Labor Statistics announced a slight uptick in October, climbing 2.6% from a year earlier. However, “core” inflation — a measure of inflation that strips out the volatile categories of food and energy — held steady at 3.3%.
While this slight increase isn’t ideal, it wasn’t totally unexpected. “We feel the story is very consistent with inflation, continuing to come down on a bumpy path over the next couple of years and settling around 2%,” said Federal Reserve Chair Jerome H. Powell in his press conference. “One or two really good data months or bad data months aren’t going to really change the pattern at this point.”
And we’re still a lot better off than we were in 2022, when inflation hit its peak at 9.1%. This progress is the result of the Federal Reserve’s aggressive disinflation strategy, keeping interest rates elevated for most of the year.
In September, however, the Fed announced a major interest rate cut of a full half-point — and, earlier this month, at the Fed’s penultimate meeting, they introduced yet another rate cut, bringing it to a range of 4.5-4.75%. This latest inflation news, however, does not preclude the approval of another rate cut in December.
But before we get into all that — and what it all means for you — let’s talk about how inflation works.
First: How is inflation measured?
Inflation is the upward creep of the prices of goods and services. It usually happens because the demand for goods and services is rising faster than companies can produce and supply them. That makes them more scarce, which makes them more valuable, which pushes prices up. When wages don’t rise to match, that creates a decrease in purchasing power. (Translation: Things cost more and you’re not making more, so you can’t buy as many things.)
Inflation is often measured using a standard benchmark called the Consumer Price Index (CPI), which you might have heard of. The CPI is calculated by looking at a standard set (“basket”) of goods (food, medical care, clothing, etc) and averaging their change in price over time.
There’s also a measure called “core inflation,” which is basically all that stuff, minus food and energy prices. It can be easier to judge what’s really happening in the economy when you exclude them, because food and energy tend to be more volatile, driven by short-lived factors, and just overall less reflective of economic health.
And the last measure to know about is called Personal Consumption Expenditures (PCE). It’s a bit broader than the CPI and weighs some things like health care a bit more heavily. It’s also the measurement that the Federal Reserve considers the most when they make policy decisions.
What drove October 2024’s inflation numbers?
After showing signs of slowdown in September, shelter prices — which have been stubbornly high — rose 0.4%in October, “accounting for over half (65%) of the monthly all items increase,” says the Bureau of Labor Statistics (BLS).
In September, shelter costs rose only 0.2% month over month, lower than August's 0.5% increase, which inspired hope that inflation measures were finally starting to catch up to what was happening on the ground. This is because the BLS only collects rent data every six months, which means readings on rent inflation are delayed. “So that’s just a catch-up problem,” Powell said in press conference. “It’s not really reflecting current inflationary pressures.”
Auto insurance, another category which has been difficult to wrangle, dropped by 0.1% in October, leveling out at 14%. (We have an explainer, btw, that talks about why car insurance has been such a problem.)
Now for the good news: Inflation for groceries cooled on a monthly basis, to 0.1% from September to October, down from 0.4%. Consumers may also experience some relief at the gas pump, with gasoline inflation slowing by 1% during the month. Just in time for those holiday road trips.
How should you manage your money right now?
It’s impossible to know what will happen in the future, especially right now, but here are some things to think about.
Don’t keep more than you need to in cash
This is something we say anyway — but when inflation is high, cash gets less valuable, so the advice becomes even more urgent. Here’s what we recommend always keeping in cash (as in, in an FDIC-insured bank account):
Money to pay your bills
Your emergency fund (three to six months’ worth of take-home pay)
Savings for short-term goals (things you’ll need money for in the next one to two years)
If you’re the kind of person who tips a little more toward “cautious” on the risk tolerance scale, you could consider adding a bit more to your emergency fund — if things are going to cost more later, your savings might not go quite as far.
But for the rest of your money, we typically recommend investing it.
Shop around for the best interest rates on savings
Higher federal interest rates lead to higher interest rates paid by savings accounts. If you have a large chunk of cash in the bank (like a complete emergency fund, for example), see if you can find a savings account paying more.
Keep investing regularly
If you’re investing for long-term goals (those more than a few years away), we’d probably recommend that you just keep doing what you’re doing. Every period of inflation is different, and in the past, it’s affected different types of investments in different ways (which is, after all, the point of having a diversified portfolio).
We do know (and as we’ve seen this year) periods of economic uncertainty tend to make the markets nervous, which can lead to volatility. So we recommend using a technique called dollar-cost averaging, which means investing regularly, a little bit at a time, no matter what’s going on in the market. You’ll end up investing when markets are up and down in a way that evens out over time. It takes the timing guesswork out of it.
TL;DR: We don’t know if inflation will continue to slow toward the Fed’s goal. All we can do is try to make the best choices we can with the information we have — and adjust along the way.