US Markets
Tuesday, November 14th, 2023 2:45 pm EDT
Key Points
- Flat October Inflation Provides Hopeful Sign: In October, there was no change in inflation compared to the previous month, indicating a potential easing of stubbornly high prices in the U.S. This stability contrasts with the previous month’s 0.4% increase in the Consumer Price Index (CPI) and is seen as a positive development for the economy.
- Core CPI Shows Improvement, Market Reaction, and Fed’s Stance: Excluding volatile food and energy prices, the core CPI increased by 0.2%, with a 4% year-over-year rise, marking the lowest annual level in two years but still above the Federal Reserve’s 2% target. The markets responded positively to this news, with Dow Jones Industrial Average futures rising by 300 points, and traders discounted the likelihood of further Federal Reserve interest rate hikes. Analysts praised the Fed for its effective policy response to the slowing inflation.
- Mixed Economic Signals and Fed’s Ongoing Concerns: Despite the positive inflation figures, there are conflicting economic signals. Nonfarm payrolls increased by only 150,000 in October, suggesting a labor market response to the Federal Reserve’s efforts to address supply-demand imbalances contributing to inflation. However, labor costs have been rising at a slower pace over the past year and a half. Despite a surge in gross domestic product (GDP) in the third quarter, growing at a 4.9% annualized pace, economists anticipate a considerable slowdown. Additionally, consumer inflation expectations are still rising, influenced by factors like gasoline prices and geopolitical uncertainties. Federal Reserve Chair Jerome Powell expressed ongoing concerns about inflation and hinted at the possibility of rate hikes if more progress is not made. The article concludes with uncertainties about how long the Federal Reserve will maintain benchmark rates at their highest level in over two decades, even if rate hikes are concluded.
In October, the United States experienced no change in inflation compared to the previous month, offering a glimmer of hope that the persistent surge in prices might be loosening its grip on the economy. The consumer price index (CPI), which measures a diverse array of commonly used goods and services, exhibited a 3.2% increase from the previous year, remaining unchanged for the month. This figure defied economists’ expectations, who had anticipated a 0.1% increase and a 3.3% year-over-year rise. September had seen a 0.4% increase in the headline CPI.
When excluding the volatile food and energy prices, the core CPI increased by 0.2%, with a year-over-year rise of 4%, slightly below the forecasted 0.3% and 4.1%. Despite being the lowest annual level in two years, this figure still surpassed the Federal Reserve’s 2% target. The market responded positively to this news, with Dow Jones Industrial Average futures rising by 300 points and Treasury yields experiencing a sharp decline. Traders also shifted away from the expectation of potential Federal Reserve interest rate hikes, as indicated by CME Group data.
The unchanged headline CPI was influenced by a 2.5% decline in energy prices for the month, counteracting a 0.3% increase in the food index. Notably, shelter costs, a significant component, rose by 0.3% in October, half the gain observed in September, resulting in a 6.7% year-over-year increase. Owners equivalent rent, reflecting what property owners could charge for rent, increased by 0.4%. Vehicle costs, previously a key inflation component, decreased during the month, with new vehicle prices falling by 0.1% and used vehicle prices declining by 0.8%, down 7.1% from the previous year. Airfares dropped by 0.9%, showing a 13.2% annual decline. However, motor vehicle insurance saw a 1.9% increase, up 19.2% from a year ago.
This report coincided with heightened attention on the Federal Reserve’s strategies against persistent inflation, which commenced in March 2022. Despite the prevailing belief in the market that the Fed has concluded its tightening of monetary policy, recent data has provided conflicting signals. October’s nonfarm payrolls increased by only 150,000, suggesting the labor market is responding to the Fed’s efforts to address supply-demand imbalances contributing to inflation. Meanwhile, labor costs have been rising at a slower pace over the past year and a half, with increased productivity in the current year.
While real average hourly earnings adjusted for inflation rose by 0.2% monthly in October, the year-over-year increase was only 0.8%. Despite the encouraging growth in gross domestic product (GDP) in the third quarter, with a 4.9% annualized pace, economists anticipate a considerable slowdown in the growth rate.
However, some indicators reveal that consumer inflation expectations are still increasing, likely influenced by rising gasoline prices and uncertainties arising from conflicts in Ukraine and Gaza. Federal Reserve Chair Jerome Powell added to market anxiety by stating that he and fellow policymakers remain unconvinced they have done enough to bring inflation back down to the targeted 2% annual rate, emphasizing a willingness to raise rates if necessary.
Despite the deceleration in inflation, experts anticipate the Fed will continue to adopt a hawkish stance, cautioning investors against complacency regarding the Fed’s commitment to reaching the 2% inflation target. Even if the Fed concludes its rate hikes, uncertainty persists regarding how long benchmark rates will remain at their highest level in over two decades.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/11/14/cpi-inflation-report-october-2023.html
