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Softer inflation could hide a hard landing

The U.S. economy is coming in for landing. Inflation is easing even as growth looks strong, but Americans are bracing for new financial pain. It’s a warning sign that the end of the post-pandemic comedown could be bumpy.

The year-over-year rate of price increases stood at 3.2% in October, barely above the Federal Reserve’s goal, the Bureau of Labor Statistics said Tuesday. Better yet, prices are unchanged from last month. Investors already seem to think this means the end of monetary tightening: futures markets are now pricing the odds of a rate hike at the Fed’s Dec. 13 meeting at zero, down from 15% on Monday, according to the CME Group.

That cooling hasn’t thus far dented unemployment, holding near historic lows in October, or growth, which clocked in at its fastest rate since late 2021 in the third quarter. Yet Americans aren’t declaring victory on either price rises or economic strength. Inflation expectations rose to 4.2% in October from 3.2% the month prior, according to the University of Michigan. That pessimism can lead households to cut back on spending, dinging business activity.

Companies are taking the shift seriously. Even as McDonald’s MCD.N beat profit estimates on Oct. 30, boss Christopher Kempczinski flagged that lower-income consumers are pulling back. Home Depot HD.N on Tuesday warned that shoppers are skipping big-ticket renovations, instead opting for smaller, cheaper projects. The U.S. is closer to the runway, but companies and consumers aren’t ruling out some last-minute turbulence. (By Ben Winck)
Source: Reuters Breakingviews (Editing by Jonathan Guilford and Oliver Taslic)

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