U.S. inflation pressures slowed again last month, Commerce Department data indicated Tuesday, with core consumer prices falling to a fresh two-year low and challenging the Federal Reserve's near-term rate hike forecasts.
The headline consumer price index for October was pegged by the Commerce Department at 3.2%, well south of the prior month's tally of 3.7% and inside Wall Street's 3.3% forecast, powered in part by falling oil and energy prices. On a monthly basis, the index showed inflation was unchanged from September, down from the 0.4% pace recorded last month and the 0.6% gain tallied in August.
So-called core inflation, which strips out volatile components like food and energy, slowed to 4.0%, the lowest in two years, while the monthly reading of 0.2% matched also came inside Street forecasts.
Lodging costs powered the core decline, falling 2.5%, while new car prices were down 0.1% even amid supply disruptions linked to the United Autoworkers' strike.
“After a summer panic in interest rates and oil prices, the inflation narrative is quickly unwinding. Today’s CPI showed more improvement on key areas like shelter and car prices," said David Russell, global head of market strategy at TradeStation. "It’s the latest item in a flood of good news hitting the market in November. A soft landing and permanent Fed pause look increasingly likely, which would lay the groundwork for a strong year end. Santa could be coming to town.”
Related: U.S. economy rips as consumer spending powers Q3 GDP 4.9%, inflation pressures ease
U.S. stocks powered higher following the data release with the S&P 500 extending in November rally by around 83 points, or 1.87% in early afternoon trading to peg its November advance at around 7.3%, while the Dow Jones Industrial Average gained 470 points. The tech-focused Nasdaq was up 315 points, or 2.129%.
Benchmark 10-year Treasury note yields were marked 17 basis points lower at 4.461% while 2-year notes were pegged at 4.836%, around 20 basis points lower from prior to the data release.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 1.4% lower at 104.147.
The Fed lifted held its benchmark lending rate to between 5.25% and 5.5% for the second consecutive meeting earlier this month, after ending its streak of twelve hikes over sixteens months, but warned that stubborn inflation pressures would likely require at least one more increase between now and early next year.
"Overall, the report is significantly better than we expected and reinforces our view that the Fed is done; it would now take an horrific CPI report for November, and likely a big rebound in payrolls too, in order to trigger a final hike," said Ian Shepherdson of Pantheon Macroeconomics.
The CME Group's FedWatch is now pricing in no chance that the Fed will lift the benchmark federal-funds rate by a quarter-point, to between 5.5% and 5.75%, when it meets next month in Washington. The odds of a hike in January were slashed to 6.2%.
Bets on a March rate cut, meanwhile, leaped to 31.4% , up from just 10.1% prior to the release, with the odds of a reduction in May pegged at 49.6%.
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