Inflation Eases Slightly to 7.7% in October
The Consumer Price Index (CPI) in October reflected a 7.7% increase over last year and 0.4% increase over the prior month. Economists had expected prices to rise at an annual 7.9% clip and 0.5% month-over-month, per Bloomberg consensus estimates. On a "core" basis, which strips out the volatile food and energy components of the report, prices rose 6.3% year-over-year and 0.3% over October. Expectations called for a 6.5% annual increase and 0.5% monthly increase in the core CPI reading. Core CPI's decline was meaningful after the measure hit its highest level since 1982 in September. The Federal Reserve keeps a closer eye on "core" inflation, which offers policymakers a more focused look at inputs like housing. Headline CPI, in contrast, has moved largely in conjunction with erratic energy prices this year. The indexes for used cars and trucks, medical care, apparel, and airline fares all declined over the month. Meanwhile, shelter — which comprises nearly one-third of the basket for consumer price inflation — contributed to over half of the monthly all-items increase. Prices on gasoline and food also continued to rise. "If this constitutes improvement, we’ve set a very low bar," Bankrate Chief Financial Analyst Greg McBride said in a note. “The pervasiveness of price increases remains problematic. Any meaningful relief for household budgets is still somewhere over the horizon.” The food index increased 0.6%, down slightly from September's 0.8% increase, and the prices of food at home rose 0.4%, the smallest monthly advance across the index since December 2021. Still, four of the six major grocery store food group indexes rose over the month. The report propelled U.S. stocks forward and sent Treasury yields tumbling as Wall Street weighed the implication of softer prints on Federal Reserve policy. Moderations in economic data have prompted hopes that the U.S. central bank will scale back on its aggressive policy stance, but Fed Chair Jerome Powell stressed earlier this month that no plans for a pause were underway. Inflation remains well above the Fed's target of 2%. The first downside surprise in inflation in several months will inevitably be received by an equity market ovation. For now, however, despite both core and headline inflation easing, the best we can expect from the Fed is a downshift in the pace of tightening. A flurry of strategists reiterated that a 0.5% rate increase is still in the cards for December — and until a longer trend of these readings, a pause on hikes is still elusive. Let the market enjoy today, it still has another 100 basis points or so of tightening to commiserate. Federal Reserve officials have repeatedly signaled that while the size and magnitude of hikes may slow, the fight against inflation is nowhere near over, and signaled the likelihood of a higher than expected liftoff of its key policy interest rate. A wave of Wall Street strategists in recent weeks have raised their bets on how much the central bank will ultimately raise its federal funds rate. Goldman Sachs was the first among big banks in the days leading up to November’s FOMC meeting to warn rates may rise as high as 5% by March 2023. TD Securities lifted its terminal rate forecast from a range of 4.75%-5.00% to 5.25%-5.50% and sees a 50-basis-point hike at the next meeting Dec. 13-14.