Core Inflation Down Sharply, at 2-year low; Fed Rate Hikes Likely Over

President Biden must be a happy fellow today as great economic news was released this morning. The core consumer price pressure fell to a fresh 2-year low last month as headline inflation continues to slow, proving that the Fed's rate hikes over the past two years have been effective.

According to the U.S. Commerce Department, data released today showed core consumer prices falling to a fresh two- Federal Reserve year low, challenging predictions of another near-term rate hike. 

The headline consumer price index for October was pegged by the Commerce Department at 3.2%, well below 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.

This means that 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.

Core inflation, which is a measure of inflation that strips out volatile components like food and energy, slowed to 4.0%, the lowest in two years, while the monthly reading of 0.2% also came inside most Wall Street, Academics and forecasts made by Republican politicians looking to tarnish President Biden’s economic policies.

The U.S. Commerce Department numbers also show that lodging costs contributed to the core decline of inflation, falling 2.5%, while new car prices were down 0.1% even amid supply disruptions linked to the United Autoworkers' strike.

David Russell, global head of market strategy at TradeStation, was quoted by The Street.com as saying….

“After a summer panic in interest rates and oil prices, the inflation narrative is quickly unwinding. Today’s CPI showed more improvement in key areas like shelter and car prices,"

"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.”

The Federal Reserve 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 sixteen months, but warned that stubborn inflation pressures would likely require at least one more increase between now and early next year. Making this latest report good news. Ian Shepherdson of Pantheon Macroeconomics also was quoted by The Street.com today.

"Overall, the report is significantly better than we expected and reinforces our view that the Fed is done; it would now take a horrific CPI report for November, and likely a big rebound in payrolls too, to trigger a final hike."

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%.

Meanwhile, bets on a March rate cut 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%. This shows Wall Street is starting to recognize the falling inflation rate and risk of a recession.

Another plus investor can look forward to is an economic recovery in Europe, Japan, and South Korea as the world economy starts to recover from the economic disruption taking place in the aftermath of the Covid-19 pandemic and the initial sharp rise in the cost of fuel as a result of the Russian invasion of Ukraine.

Disgraced former President Donald Trump claim that the United States is in economic decline appear to be hogwash.