The CPI inflation rate unexpectedly slid to 7.7% in October, continuing to ease from June's 9.1% peak. Core inflation, which strips out food and energy prices, also came in surprisingly soft, finally beginning to ease after hitting a new 40-year high in September. Following the CPI report, which shrinks odds of another big Fed rate hike in December, the Dow Jones industrial average surged in Thursday morning stock market action.
The CPI inflation rate eased a half-percent from 8.2% in September, coming in below Wall Street expectations of 8%. The 7.7% annual gain was the lowest since January. The consumer price index rose 0.4% on the month, well below the 0.7% expected increase.
The core CPI rose 0.3% from September. Economists had expected a 0.5% monthly increase. The annual core inflation rate fell to 6.3% from 6.6%. Economists had expected core CPI inflation to remain at the highest level since August 1982.
A cooler-than-expected inflation reading should allow the Fed to slow the pace of rate hikes next month. But a string of cooler readings will be needed for the Fed to pause tightening before its key rate hits 5%.
Jobless Claims
Separately, the Labor Department reported that new claims for unemployment benefits rose 7,000 to 225,000 in the week through Nov. 5. Economists were predicting initial claims of 221,000. The number of people continuing to claim benefits increased 6,000 to 1.493 million.
No Red Wave In Midterm Elections Dampens S&P 500 Rally Mood
Goods Vs. Services Spending
Inflation in goods prices, excluding food and energy, has decelerated from double-digit increases earlier in the year. That progress picked up speed in October. Core goods prices fell 0.4% on the month. That brought down year-over-year inflation to 5.1%, down from 6.6% in September.
Inflation in nonenergy services prices, which affects 56% of consumer budgets, still hasn't begun to subside, rising 0.5% on the month and 6.7% from a year ago, unchanged from September.
Price increases for such services are closely linked to the tight job market and high wage growth. If wages weren't rising close to 5%, big price increases would hurt demand. Despite a rise in the unemployment rate to 3.7% in October, the labor market remains much too tight for the Fed.
Dow Jones Reaction To CPI Report
The Dow Jones jumped 2.8% after the CPI report. The S&P 500 shot up 3.7% and the Nasdaq composite 4.9%.
Stocks are trying to reboot a rally that took a detour on Wednesday as Wall Street reacted to midterm election results and the latest leg down in the crypto crash. Technically speaking, Thursday's CPI report came at a key time for markets.
The Dow Jones finished right at its 200-day moving average on Wednesday, while the S&P 500 fell below its 50-day line. Both indexes powered above those key levels at Thursday's open.
Through Wednesday's close, the Dow has fallen 11.65% from its record closing high. The S&P 500 is down 21.85% from its peak close, while the Nasdaq has tumbled 35.5%.
The 10-year Treasury yield tumbled 22 basis points to 3.93% after the CPI report.
Following the tamer inflation reading, odds for a 75-basis-point hike on Dec. 14 slid to 19% from 48%, according CME Group's FedWatch page. Odds now slightly favor a quarter-point hike when the Fed again updates policy on Feb. 1.
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CPI Inflation Report Details
Prices for used cars and trucks fell 2.4% on the month. New vehicle prices rose 0.4% from September, while the annual price increase moderated to 8.4% from 9.4% the prior month.
Energy prices rose 1.8% on the month, while increasing 17.6% from a year ago.
Prices for food climbed 0.6% on the month, as the annual increase slowed to 10.9% from 11.2% in September.
The rent index rose 0.7% on the month and 7% from a year ago.
Prices for transportation rose 0.8% on the month and 15.2% from a year ago.
Medical services prices fell 0.6% in October, while increasing 5.4% from October 2021. This should be the start of a trend of weak medical services prices. That's because the data source — the retained earnings of managed care companies — is only updated once a year. The new batch of data indicates that medical insurance holders essentially got more from their paid premiums. That's because the comparison was from earlier in the pandemic, when people were more likely to delay procedures and visits to the doctor.
