The consumer price index was flat in October
Maybe the Fed is done after all. That seems to be the immediate reaction to October’s consumer price index reading. The index was flat in October, coming in fractionally weaker than the 0.1% increase that had been anticipated by economists.
The fact that the actual result from the month was only 0.1% below expectations isn’t terribly meaningful in and of itself. A one-tenth-of-a-point miss isn’t a game changer. However, the fact that prices were — in aggregate — unchanged for the first time in 15 months reinforces the persistence of disinflationary forces in the economy and acts as a symbolic milestone between the challenging inflation environment of the last few years and an expected reversion to a more stable price regime.
On the back of a “no inflation” October, the headline consumer price index dropped a half point to 3.2% over the past year, retracing its uptick over the two prior months. Falling energy prices were a key catalyst for the decline, although the degree of increase in core prices also softened last month.
Stripping out food and energy, the core CPI rose by 0.2% in October and eased to 4.0% over the past 12 months, marking its slowest 12-month gain in over two years. It also marked the seventh consecutive monthly decline in the one-year reading, which peaked at 6.6% in September 2022.
The report was largely good news, confirming that the economy’s broad disinflationary trend remains on track as pandemic-era disruptions dissipate and the Fed’s aggressive tightening cools demand. Still, that good news comes with a considerable asterisk in the form of elevated core inflation that remains well above the Fed’s target.
The challenge for policymakers lies in their desire to do enough to create a bit more slack in labor market conditions and allow inflation to recede back toward its 2% target while allowing the economy to slow to glide speed without crashing. As a goal, it’s been seldom achieved by their central bank predecessors. Prior soft landings have typically followed moderate Fed tightening cycles and during periods in which banks didn’t tighten lending standards, allowing the flow of credit to continue. Neither is the case today. The final chapter in the current cycle has yet to be written, but the trifecta of the pandemic-era inflation surge, aggressive Fed interest rate hikes, and a considerable tightening in bank lending standards don’t bode well for the soft-landing scenario.
Nonetheless, the voting machine of the market embraced today’s report, with equity futures soaring and the yield on the 10-year Treasury slipping back to 4.5% on the news. It was a sharply positive reaction for investors, perhaps because of pre-release skepticism that economists were too optimistic in their forecasts. It could also be that seeing no monthly gain in print makes a return to a more normalized inflation environment seem closer or more real.
If that’s the case, it also means that a Fed that’s exceedingly wary of declaring victory against inflation prematurely may be able to stand pat from here, bringing an end to the central bank’s most aggressive tightening cycle in decades. Attention may instead turn to the question of how soon policymakers may be able to consider cutting rates. If inflation continues to retreat, the response to the Fed’s “higher for longer” mantra will increasingly be the question of how much longer?
The bottom line? The disinflationary trend is intact, raising investor spirits and encouraging hopes that a soft landing may still be in the cards, even if it’s not a given. An equity market that appeared to be looking for a catalyst for near-term direction has seemingly found it.
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