The October Consumer Price Index (CPI) rose by 0.4% while the average index (excluding perishable food and energy components) increased by 0.3%. As a result of these movements, the 12-month inflation rate decreased to a 7.7% increase in the overall CPI and 6.3% in the core. The monthly increase – and its effect – was less than the financial markets expected.
In response to the figures, the financial markets were largely in line with expectations of future shutdowns and Federal Reserve lower: The S&P 500 Index rose slightly more than 5.5%, and the yield on the 10-year Wealth The rate dropped by a staggering 30 basis points to around 3.82%. The decline in consumer prices was led by a 0.4% drop in inventories, the biggest drop since the fall of the COVID-19 pandemic in April 2020 (The core CPI fell by the same amount in March this year), used car prices fell by 2.4%. After rising for the past two years, used car prices are up just 2.0% over the past 12 months. As computer chips became more common, new car prices responded to the increase in production and rose by 0.4% on the month, the lowest pace in seven months. The gain in new car prices over the past 12 months fell to 8.4%, the slowest decline in more than a year.
The sharp drop in consumer goods prices was offset by another sharp rise in services prices, although it was less than in the previous month. Housing prices are on the rise, as the decline in home prices and rents continues to hold up to the CPI. If it hadn’t been for the one-time drop in health care costs (from lower insurance rates), labor costs – and the overall CPI – would have looked much worse. However, this is slower than the increase in consumer prices and perhaps additional signs that inflation has reached its peak to convince the participants in the financial market that the Fed will not have to tighten too much going forward.
This is a major concern for the Fed at its December Federal Open Market Committee meeting, with a 50-basis-point increase now more likely than a fifth consecutive 75-bps hike. Indeed, the Fed futures market now has the possibility of the Fed tightening its rate cut by just 25 bps. But even at a slower pace, inflation is still above the Fed’s 2.0% target (note that the Fed’s target is based on the inflation index, which was not as hot as the CPI).
Annual CPI growth for October was 4.9% – well below the peak, to be sure, but still above 2.0%. Although the annual rate of return for the month, at 3.7%, is too fast for the Fed. The strategy is good, but inflation has not stabilized enough for the Fed to take its foot off. But perhaps the Fed will see if inflation slows down in the coming months and simply hit the brakes.
David W. Berson they contacted each other Cumberland Advisors in November as Chief US Economist after retiring as Vice President and Chief Economist at National Insurance. Contact him at [email protected] or 941-926-6279.
