In October, the CPI inflation rate dropped unexpectedly to 7.7%. It has continued to decline from its peak of 9.1% in June. Core inflation (which excludes food and energy) also surprised with a soft reading. It has finally begun to ease off after reaching a new high of 40 years in September. The Dow Jones Industrial Average surged Thursday morning following the CPI report that reduced the odds of a big Fed rate increase in December.
The CPI inflation rate fell by a half percent from 8.2% to 8.1% in September. This was below Wall Street's expectations of 8%. The annual increase of 7.7% was the lowest since early January. The Consumer Price Index rose by 0.4% in the month of March, which is well below the 0.7% increase expected.
The core CPI increased by 0.3% since September. Economists expected a monthly increase of 0.5%. The core annual inflation rate dropped from 6.6% to 6.3%. Economists expected that core CPI inflation would remain at its highest level since August 1992.
The Fed should be able to slow down the rate of rate increases next month if the inflation reading is lower than expected. The Fed will need to see a series of lower inflation readings before it can pause its tightening.
Separately the Labor Department reported new claims for unemployment insurance rose by 7,000 to 225,000 in the week ending Nov. 5. The economists had predicted initial claims at 221,000. The number of people who continue to claim benefits has increased by 6,000, to 1.493 millions.
The S&P 500 rally is dampened by the fact that there was no red wave in midterm elections
The inflation rate in goods, excluding energy and food, has slowed down from the double-digit increase earlier this year. This progress accelerated in October. Core goods prices dropped 0.4% in October. This brought the inflation rate to 5.1% from 6.6% in September.
The inflation in prices of non-energy services, which affects 56 percent of consumer budgets still hasn't started to subside. Prices are up 0.5% from last month, and 6.7% compared to a year earlier, but unchanged since September.
The tight job market, and the high growth in wages are directly related to price increases. Big price increases could hurt demand if wages were not rising at a rate close to 5%. The Fed is concerned that the labor market is still too tight despite a rise in unemployment to 3.7%.
After the CPI report, Dow Jones rose 2.8%. The S&P 500 jumped 3.7%, and the Nasdaq Composite 4.9%.
Stocks are attempting to restart a rally which took a detour Wednesday, as Wall Street responded to the midterm elections results and the latest leg of the crypto crash. Technically, the CPI report on Thursday came at an important time for the markets.
The Dow Jones closed at its 200 day moving average on Tuesday, while the S&P 500 dropped below its 50 day line. The indexes both opened above these key levels on Thursday.
The Dow Jones Industrial Average has dropped 11.65% since its closing record high. The S&P 500 has fallen 21.85% since its peak, while the Nasdaq is down 35.5%.
After the CPI report, the 10-year Treasury yield fell 22 basis points to 3.93 %.
According to CME Group's FedWatch, after the lower inflation reading, odds of a 75 basis-point increase on December 14 dropped from 48% to just 19%. The odds now favor a quarter point hike when the Fed updates its policy again on February 1.
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Prices of used cars and trucks dropped 2.4% in the last month. The price of new vehicles rose by 0.4% in September. However, the annual increase in prices has moderated from 9.4% to 8.4%.
Prices of energy rose by 1.8% in a month and 17.6% compared to a year earlier.
Food prices rose 0.6% in October, but the annual rise slowed from 11.2% to 10.9%.
Rent index increased by 0.7% in a month, and 7% compared to a year earlier.
Transport prices rose by 0.8% in the last month and by 15.2% compared to a year earlier.
Prices for medical services fell by 0.6% in October while rising 5.4% since October 2021. It is likely that this will be the beginning of a downward trend in medical service prices. The data source, the retained earnings of managed-care companies, is only updated annually. The latest data shows that those who pay for medical insurance received more value from their premiums. This is because the data was compared from an earlier time in the pandemic when people were less likely to delay medical procedures or visits to doctors.
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