Note to readers: IBD covered release of CPI data in this new article.
Tuesday's consumer price index for October is expected to show that inflation remains too sticky for the Federal Reserve's comfort, with the core CPI inflation rate holding above 4%. The report has the potential slow down the recent S&P 500 rally that's been fueled by growing hopes that inflation's final descent will be quick and painless.
Recent stock market action suggests that Wall Street is convinced both that the Fed is done hiking its key interest rate and that economic growth will moderate, but not to near-recessionary levels. Those Goldilocks assumptions could be challenged by a hot core CPI reading, which is what Deutsche Bank expects.
CPI Inflation Rate
The core CPI, excluding food and energy, should rise 0.4% in October, Deutsche Bank economists estimate. That would lift the 12-month inflation rate to 4.2%. The consensus calls for a solid 0.3% monthly increase and steady 4.1% core inflation rate.
Expectations call for the headline CPI to rise just 0.1% in October amid lower energy prices. That would drop the 12-month headline CPI inflation rate to 3.3% from 3.7%. However, the Fed puts more weight on core inflation.
Services Inflation
Deutsche Bank sees risk that service prices will remain hot, with a 0.6% rise in prices for core services excluding rent and medical services. They note that the average daily hotel rate rose more than 4% in October. Further increases in airfares also are possible after a nearly 50% rise in jet fuel prices from June to September.
Lately, the Fed has focused on supercore services inflation, which excludes energy and housing. That's because prices for labor-intensive services such as haircuts and hospitality tend to be closely linked to wage growth trends.
Medical care services also fall into that supercore category. Over the 12-months through September, CPI data shows medical care services prices falling 2.6%, but that's a poor reflection of reality.
Medical services prices have been dragged down by a reported 37% drop in health insurance costs, which is a function of the Labor Department's methodology that is based on health insurer profits from 2021. Those profits are lower when the insured population uses more medical care, getting more out of their coverage.
But the October CPI reading will be based on how insurers fared during 2022, which could create some upside risk to medical care costs.
Retail Sales, PPI
Even if the core CPI comes in firm, markets may stay resilient as long as Wednesday's retail sales data shows an expected slowdown. The Fed will be patient on inflation, as long as growth is moderating.
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.
On Monday, the National Retail Federation and CNBC released their new monthly estimate of retail sales based on data from more than 140 million credit and debit cards. The NRF/CNBC data show core retail sales (excluding autos, gas and restaurants) dipped 0.03%.
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 was effectively flat in Monday afternoon stock market action, following the best two-week surge in just over a year. The rally has come as the 10-year Treasury yield pulled back after peaking just under 5%.
On Monday, the 10-year yield was flat at 4.63%. A move back above 4.7% could be a yellow light for the current rally.
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.
