Americans cut back on their retail spending in October, the first decline since March, and wholesale inflation dropped the most it has in over three years, signaling the economy is heading to a cooling stage.

Retail sales declined 0.1 percent last month, compared with a substantial hike of 0.9 percent in September, according to a report from the Census Bureau released on Nov. 15. While retail sales fell for the first time in seven months, the data were below economists' expectation of 0.3 percent decline for the month. September's figure was adjusted to a 0.9 percent increase from the previous 0.7 percent rise. Excluding sales of motor vehicles, auto parts, and gasoline, retail sales increased 0.1 percent last month.

Another major economic indicator, wholesale inflation, measured by the Producer Price Index, unexpectedly dropped 0.5 percent last month. It was the largest decline since April 2020 and attributable to a sharp decrease in gasoline prices, the Labor Department's Bureau of Labor Statistics reported on Nov. 15.

Most retail categories posted declines in October, with furniture sales falling 2.0 percent while cars and auto parts sales decreased 1.1 percent. General merchandise sales, a category with major retailers such as Target and Walmart, reported a 0.2 percent drop.

Clothing sales remained unchanged, but online sales increased 2.0 percent, while sales of electronics and appliances rose 0.6 percent. Restaurants posted a 0.3 percent increase, while grocery sales rose 0.7 percent. Health and personal care sales jumped 1.1 percent.

The report followed the slowing inflation data as October's Consumer Price Index (CPI) rose 3.2 percent from a year ago, down from a 3.7 percent increase in September, marking the slowest pace since March 2021, according to the Bureau of Labor Statistics's inflation report.

Rate Hikes Are Done?

The data, combined with a cooling labor market, led economists to conclude that the Federal Reserve's current rate hiking cycle—the most aggressive monetary policy tightening campaign since the 1980s—was over. Still, there is no sign that the economy is sliding into recession. The drop in sales in October was less than expected and followed three straight months of hefty gains.

"Signs of moderating consumer demand and inflation argue for an extended Fed pause," Lydia Boussour, senior economist at EY-Parthenon in New York, told Reuters. "While we believe the Fed is done raising interest rates, the bar is still high for rate cuts."

Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co., wrote in a note: “Along with the encouraging October CPI report and healthy slowing in employment growth, the pullback in consumer spending after the summer spending spree will give the Federal Reserve comfort that their restrictive monetary policy stance is reducing inflationary pressures,” according to Bloomberg.

Financial markets are even anticipating a rate cut next May, according to CME Group's FedWatch tool. Since March 2022, the Fed has increased its policy rate 11 times, by 525 basis points, to the current range of 5.25–5.50 percent.

Earlier this week, UBS noted in its 2024–26 U.S. economic outlook that it expected the Federal Reserve to cut rates by up to 275 basis points in 2024, worrying that the U.S. economy might fall into recession, CNBC reported.

Reuters contributed to this report.