That was the rate of annual inflation in the United States in October, according to data released last Thursday (11/10) by the U.S. Bureau of Labor Statistics. The Consumer Price Index for All Urban Consumers rose 0.4% from September (seasonally adjusted) and 7.7% in the last 12 months.
Contributing to lower annual inflation were prices of used cars, clothing, and medical care, all of which dropped, as well as food, whose prices increased more slowly. Energy prices went up, on the other hand, after having declined in the previous two months.
The good news extended to the core measure of inflation (i.e., without food and energy). The following table summarizes the latest data and what the market expected them to be. Clearly, the numbers released by the BLS beat expectations, positively surprising the stock and bond markets.
Even if the chances that the Federal Reserve will continue to raise rates remain high, the fact that it may do so more slowly, or end the process sooner, or settle on a lower terminal rate was enough to send markets soaring. All major stock indexes gained substantially, and the same was true for U.S. bond prices. The S&P 500 ended up the day 5.5% higher, while the Nasdaq Composite (+7.4%), the Dow Jones (+3.7%), and the Russell 2000 (+6.1%) also moved up substantially. At the same time, Treasury yields plummeted along the entire curve. Also, the dollar fell, with the Dollar Index closing the day at 107.29 (dropping almost 2.5%). This marked the biggest daily drop since March 2009. The index is now 6% below its recent peak in September.
The Federal Reserve has increased rates six times this year, starting in March. The target for the federal funds rate has gone from 0-0.25% to 3.75-4%. The labor market remains tight, with unemployment at 3.7% and job openings at historically high levels, giving more room to the Fed to hike interest rates. However, some evidence already points out that the strong wage gains we have seen in the United States might be over. On top of that, the housing market is clearly feeling the effects of higher rates. Finally, shipping costs (overseas carriers and road transport) have dropped steeply from the levels they reached during the worst of the pandemic.
Is this the start of a disinflationary trend? It’s too early to tell, but October’s CPI was undoubtedly a good sign. Fed officials have already pointed that a slower pace of rate increases is being considered. Currently, we expect the FOMC to increase rates by 50 basis points in December. The latest rate of change in the CPI is good news, but still represents annualized inflation of 4.9%, considerably more than the 2% average the Fed targets. Additionally, the yearly rise in prices of services in October was the highest in four decades. Moreover, the preliminary data released by the University of Michigan regarding its Consumer Sentiment Index show an expected inflation rate for the year ahead of 5.1%, rising from 5% in October. The Fed will probably wait not only for actual inflation to decrease, but also for inflation expectations to drop before easing their currently contractionary monetary policy. However, we are moving in the right direction, and we can expect the lower annual inflation reported in October to contribute to reduce inflation expectations in the next survey. Overall, the 7.7% number gives us a reason to be (prudently) optimistic.
The CPI (Consumer Price Index) measures the prices of a representative basket of consumer goods and services. Every month, the CPI is reported by the U.S Bureau of Labor Statistics.
The FOMC (Federal Open Market Committee) is the monetary policymaking body of the Federal Reserve System.
The S&P 500 index contains the 500 largest companies in the US market listed on the NYSE or NASDAQ.
The Nasdaq Composite index includes more than 5,000 shares of companies listed on the Nasdaq Stock Exchange.
The Dow Jones index measures the performance of the industrial component of US stock markets. It is the oldest market index in the US.
The Russell 2000 index contains the smallest 2,000 companies in the Russell 3000.
The Russell 3000 index seeks to emulate the US stock market. Contains the largest 3,0000 publicly traded companies and represents 97% of the North American market.
The Dollar Index measures the relative strength of the U.S Dollar against a basket of six currencies (Euro, Pound, Yen, Canadian Dollar, Swiss Franc, and Swedish Korner).
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