The consumer price index showed that core price pressures rose less than expected in October, as services inflation moderated. After the inflation data, which makes another Federal Reserve rate hike unlikely, the S&P 500 pointed sharply higher, as it looks to extend its massive two-week rally.
CPI Inflation Report Hits And Misses
The overall consumer price index was unchanged on the month, below expectations of a slim 0.1% increase. The 12-month CPI inflation rate fell to 3.2% from 3.7% in September. Economists had expected the inflation rate to dip to 3.3%.
The core CPI, which strips out volatile food and energy prices, rose 0.2% vs. September levels, trailing 0.3% estimates. The annual core inflation rate ticked down to 4% vs. forecasts of 4.1%. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Core goods prices fell 0.1% on the month. Over the past 12 months, core goods prices are up just 0.1%. Core services prices rose 0.3% from September, while the 12-month change eased to 5.5% from 5.7% the prior month.
Fed Chair Jerome Powell has said that the most important category of spending for the inflation outlook is core nonhousing services, reported with the Commerce Department's late-month personal income and outlays data. Wall Street looks to the CPI gauge of services less rent of shelter as a reasonably close proxy.
October's CPI report showed services less rent of shelter prices rose a moderate 0.3% on the month after jumping 0.6% in September.
Fed Policy Impact
Ahead of the CPI report, markets were pricing in 14% odds of a quarter-point Fed rate hike on Dec. 13 and 27% odds of a hike by the subsequent policy update on Jan. 31. Fed rate-hike odds for the Dec. 13 meeting fell to zero after the CPI data. Odds of a hike on Jan. 31 also fell to zero.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, called the CPI report "The (almost) final nail in the coffin" of Fed rate-hike talk. Still, he noted that lodging costs fell by 2.5%, even as hotel room-rate data compiled by STR had shown a hefty increase. This happened for the second-straight month, suggesting CPI numbers "will have to catch up at some point."
Markets had downgraded chances of another hike over the past month, as Fed policymakers said that the rise in the 10-year Treasury yield is helping to slow growth, limiting the need for further policy tightening. Fed chair Jerome Powell's Nov. 1 discussion of stronger labor-force participation and moderating wage growth further bolstered the case that the Fed is done.
After Tuesday's benign CPI report, markets are now pricing in about 62% odds of a rate cut at the May 1 meeting.
Still, the positive stock market reaction and accompanying fall in the 10-year Treasury yield have loosened financial conditions, which could help extend stronger-than-expected economic growth.
Wednesday's retail sales report for October will be a key focus for markets this week, but tamer inflation means the Fed can be patient in waiting for growth to slow.
After a consumer spending spree in the third quarter, economists expect a 0.3% decline in October retail sales, driven down partly by soft auto sales. Excluding autos, sales should dip 0.1%, with a 0.2% rise outside of both vehicles and gas.
Also on Wednesday, the producer price index report on wholesale prices will include data on health care services, airfares and portfolio management fees that feed into the PCE price index, the Fed's primary inflation gauge.
S&P 500
The S&P 500 surged 1.9% in Tuesday morning stock market action. The S&P 500 dipped 0.1% on Monday following a 7.2% surge in the past two weeks. The rally has come as the 10-year Treasury yield pulled back after peaking just under 5%.
On Tuesday, the 10-year yield tumbled to 4.46% from 4.63%.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
CPI Report Details
Energy prices fell 2.5% on the month and are now down 4.5% from a year ago.
Prices for food served at home rose 0.3% vs. September. The 12-month inflation rate eased to 2.1%.
Food away from home prices, which tend to be more affected by labor costs, rose 0.4% on the month and 5.4% from a year ago.
The CPI report showed used car prices falling 0.8% on the month and 7.1% from a year ago. New vehicle prices dipped 0.1% on the month, lowering the 12-month increase to 1.9%.
Apparel prices rose 0.1% and are now up 2.6% from a year ago.
Transportation services prices rose 0.8% on the month, even as airfares fell 0.9%.
Prices for shelter rose 0.3% from September and 5.7% from September 2022. The monthly gain was restrained by a 2.9% drop in hotel and motel prices.
