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In the most recent data release from the Bureau of Labor Statistics on Tuesday, consumer prices exhibited stability, remaining unchanged from the previous month of October. However, headline inflation faced a downward pull due to a decline in oil prices. On an annual basis, the Consumer Price Index (CPI) indicated a rise of 3.2% over the prior year in October, reflecting a deceleration compared to September’s 0.4% monthly increase and a 3.7% annual gain.

Economists, relying on Bloomberg data, had anticipated a 0.1% month-over-month increase and a 3.3% year-over-year rise. The moderation in headline figures was primarily attributed to lower energy costs, with energy prices experiencing a 2.5% month-over-month drop, notably influenced by a 5% reduction in gas prices during October.

The “core” inflation, which excludes the more volatile costs of food and gas, showed a 4.0% year-over-year increase in October, marking a slower pace compared to the annual rise observed in September. Monthly core prices also saw a 0.2% climb, lower than the previous month.

Key takeaways from the inflation report include a 6.7% annual increase in the shelter index, the slowest in a year, with a 0.3% month-over-month rise. Rent increases, while remaining elevated, exhibited signs of easing, with the index for rent and owners’ equivalent rent rising 0.5% and 0.4%, respectively, on a monthly basis.

The October report indicated rising indexes for motor vehicle insurance, recreation, personal care, and apparel, while used cars and trucks, new vehicles, airline fares, and household furnishings and operations witnessed decreases.

The food index showed a 3.3% increase in October over the last year, with a 0.3% rise from September to October. Notably, apple prices experienced a significant 7.9% month-over-month drop, the most significant decline since 1987.

Following the data release, U.S. stocks experienced an early surge, accompanied by a drop in the 10-year Treasury yield to around 4.45%, and the 30-year Treasury yield declining to approximately 4.61%.

Despite inflation remaining above the Federal Reserve’s 2% target, market sentiments suggest a belief that the Federal Reserve is unlikely to raise rates in December. The October CPI report, which displayed softness on the services side, aligns with the expectation that the Fed will maintain its current rates due to soft inflation and tight financial conditions. Analysts, including Ellen Zentner, Chief Economist at Morgan Stanley, and Eugenio Aleman, Chief Economist at Raymond James, interpret the report as positive for the Federal Reserve and the markets. However, caution prevails as the economy’s growth rate may have shifted, and services inflation could prove persistent, reflecting tight labor market conditions. The path to weaker services inflation hinges on a continued cooling in labor market conditions, indicating that the Fed’s decision-making regarding interest rates remains complex.

Shayne Heffernan

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