Consumer prices were flat overall last month and rose 3.2% year-on-year, a slower pace than in September, the Labor Department said on Tuesday (14 November 2023). Headline inflation reached a recent peak of 9.1% in June 2022.
Stocks and government bonds rose sharply
The rise in so-called core prices, which exclude volatile food and energy items, also showed that underlying price pressures were easing. The easing reflected lower prices for cars and air fares and more moderate growth in the cost of housing and other services. Core inflation is often considered a better predictor of future inflation than headline numbers. Stocks and Treasuries rose sharply as investors concluded that the Fed had raised rates for the last time and shifted focus to when officials might start cutting rates.
The Nasdaq closed up 2.4%, while the S&P 500 rose 1.9%, the biggest one-day jump for both since April. The Dow Jones industrial average added nearly 500 points, or 1.4%.
Biggest one-day drop
Yields in Treasuries fell sharply, with the benchmark 10-year note down 0.191 percentage point to 4.440% on Tuesday, the biggest one-day decline since the March failure of Silicon Valley bank . Yields are falling as bond prices rise.
With the October report, core prices have risen for five consecutive months at a slower pace than in the previous two years. This string of lower readings is getting closer to what Fed officials have long talked about as the need to convince them that there is no longer a need to raise rates.
They raised rates at the fastest pace in four decades
When inflation first spiked in 2021, the Fed and most economists thought that the price increases were mostly related to pandemic-induced disruptions and that they would largely go away on their own. Officials reversed themselves in late 2021, concluding that price pressures were being driven by excessively strong demand, and last year raised rates at the fastest pace in four decades to fight inflation, which had also reached 40-year highs.
At the end of last year, they slowed the pace of growth and raised their benchmark rate at a more moderate pace by July. By holding rates steady next month, the Fed would extend its current pause to about six months.
Officials, including Fed chief Jerome Powell, have been reluctant to declare "victory" over inflation by pointing to past instances when they thought price pressures were receding, only to turn around. Some officials are also cautious because of the risk that inflation will stall above the Fed's 2% target even as it continues to fall.
Other Fed officials have recently praised the significant progress in tracking the decline in inflation without a large increase in job losses.
The data also reduce the outlook
Analysts said the latest data also lowered the prospect that the Fed will have to resume rate hikes early next year. Rather than focusing on whether to raise rates, the discussion at the next meeting of officials could instead focus on whether and how to adjust the guidance in their post-meeting statement to reflect recent progress on inflation as well as the fading prospects for further rate hikes.
Consumer spending helped boost economic resilience
Whether the Fed can sustain this painless decline in inflation depends in part on how the economy responds to past monetary tightening in the year ahead.
Strong consumer spending has helped bolster this year's economic resilience, but economists predict Americans will pull back as the impact of the Fed's rate hikes continues to permeate the economy. That includes an expected slowdown in job and wage growth, which could weaken Americans' willingness to spend.