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Consumer prices in October were 7.7% higher than a year ago

AILSA CHANG, HOST:

Here's something you haven't heard in a while - good news about inflation. Yes, prices are still going up, but not as fast as they have been. And some prices are actually coming down. That news today sent stock prices soaring. The Dow Jones Industrial Average jumped more than 1,200 points. But even though inflation eased a little bit last month, it will still cost more this year to get some of those traditional Thanksgiving treats. And to talk more about that, we're joined now by NPR's Scott Horsley. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK. So what brought inflation down last month and how far exactly did it fall?

HORSLEY: Annual inflation in October was 7.7%. That's down half a point from the September rate. In fact, it's the lowest inflation's been since January. We saw falling prices for things like used cars, airline tickets and health insurance. Some of that reflects a drop in demand. Some of it suggests supply chains are coming untangled. And some of this is the result of retailers who stockpiled too much inventory and now they're having to offer discounts. That's why you saw a drop in clothing prices last month, for example.

CHANG: OK. So Wall Street obviously really seemed to like this report. Talk about why.

HORSLEY: This was the biggest stock market rally in two years. You can kind of understand that inflation is moving in the right direction. But some investors seem to be taking that as a sign that the Federal Reserve will soon stop raising interest rates, even though the Fed's been very clear, that is not its intention. Economist Kathy Bostjancic, who's with Nationwide, thinks today's big market rally was something of an overreaction.

KATHY BOSTJANCIC: Markets are really eager to declare victory for the Fed on the inflation front. You know, I think it's premature.

HORSLEY: While inflation has come down a bit, 7.7% is still really high. It's almost four times the Fed's inflation target. And that means the central bank is probably going to have to keep raising interest rates in an effort to tamp down demand. Next month's rate hike could certainly be smaller than the supersized increases we've seen at recent Fed meetings, but that doesn't mean the Fed is close to declaring mission accomplished.

CHANG: I mean, what is still driving inflation?

HORSLEY: Housing accounted for about half the price increase we saw between September and October. Gas prices were also up a bit last month, although still down from their peak early in the summer. And, you know, food prices are still climbing at a rapid rate. Grocery prices in October were up 12.4% from a year ago. Mary Daly, who heads the Federal Reserve Bank of San Francisco, says that's a particular strain right now, you know, two weeks before one of the biggest eating holidays of the year.

MARY DALY: If you're at the grocery store right now, you see it - in any grocery store you go to - people making tradeoffs. How many people can they invite? What are they going to serve? Are they going to trade down? Are we having a different kind of meal? Are we not having as many options? Because it's just very expensive.

HORSLEY: This could be the year some families decide to eat out on Thanksgiving. Restaurant prices have risen more slowly than supermarket prices over the last year. Wells Fargo says inflation is hitting a lot of the traditional Thanksgiving favorites like turkey and potatoes and cranberries.

CHANG: Wait. Wait. What's behind those price increases specifically?

HORSLEY: Turkey flocks, like all poultry, were hard hit this year by the avian flu. That's also why we continue to see big jumps in the price of eggs. There have also been some adverse weather conditions - hot, dry weather in the pacific - hurt the potato crop. And farmers throughout the country like Brent Leggett have seen their own production costs go up.

BRENT LEGGETT: Five-dollar diesel fuel and a-thousand-dollar-a-ton fertilizer hits home pretty fast.

HORSLEY: Leggett raises sweet potatoes in Nashville, N.C. Sweet potatoes are actually pretty abundant this year. So that's one item on the holiday menu where you might find some bargains.

LEGGETT: We have a very good crop. I always say sweet potatoes are good to you and good for you, which makes them, you know, a very good value.

HORSLEY: My family always has sweet potatoes at Thanksgiving, cooked with a little brown sugar and bourbon.

CHANG: Yummy.

HORSLEY: Leggett, who heads the North Carolina Sweet Potato Commission, is trying to get people to eat more of them year-round. And when grocery prices are high, inexpensive, long-lasting root vegetables are something we can all be thankful for.

CHANG: Absolutely. That is NPR's Scott Horsley. Thank you so much, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.