Prices are still rising, but glimmers of hope are emerging

The consumer price index (CPI) rose again in October, but by a comparatively limited 0.4% compared with the consensus forecast for 0.6%. Core inflation, which excludes more volatile food and energy prices, rose by an even more muted 0.3% for the month. On a year-on-year basis, headline CPI dipped to 7.7% — its lowest reading since January. Core CPI also eased.

This was a report that investors have been looking for — one that provides tangible evidence of a meaningful slowdown in the pace of inflation. Although it’s only one report for a single month, it provides a reason for renewed hope that the greatest inflation challenge in decades may be subsiding.

Underlying the top-line results were indications that the average American household is still feeling sticker-shock on essentials. Food prices increased by another 0.6% in October, although grocery prices rose by a milder 0.4%. Restaurant prices surged by 0.9% for the third consecutive month, as tight labor markets continue to put upward pressure on service sector wages. Rising service wages are readily apparent when diners get their bill.

Notably, shelter costs rose again in October at a pace that’s still accelerating. As a sizable component of the index, shelter rose by 6.9% over the past year, with no signs of abating yet despite the marked decline in home sales. There’s a notable lag between reported changes in home price activity and the point that it is reflected in CPI shelter costs. When the housing market was red-hot in 2021, shelter cost increases were much more subdued. With the housing sector now arguably in recession and prices nationally easing, the prior momentum is still carrying the shelter component of the index higher. It’ll soften in time but probably not until well into 2023. Given its substantial representation in the index, continued upward momentum in shelter costs will put a practical floor under the CPI for some time, even if pricing on other goods and services continue to ease.

To be clear, inflation is still a problem for consumers, particularly lower-income households that are struggling to make ends meet. It’s a problem for investors that have seen painful declines in their portfolios this year, as surging interest rates knocked down both bonds and stocks, leaving few places for investors to hide. It’s also the problem for the Fed, which remains focused on reining it in, even at the cost of jobs and a potentially premature end to the current expansion.

For consumers, investors, and policymakers, this report provides good news that progress is being made, even if that progress has been much slower than anyone would hope. It’s also a reminder that we’re not yet out of the woods, and the Fed will justifiably remain in tightening mode for some time to come.

The bottom line? A lower-than-anticipated inflation print is good news for investors looking for signs that the end of the Fed tightening cycle may be within sight, providing at least a near-term boost to investor sentiment. It’s far from signaling an all-clear though. The Fed isn’t done, and recession risks remain high. Investors should be prepared for the potential for additional volatility ahead.