The core Consumer Price Index, which excludes the costs of food and energy, increased by 0.2% compared to September. The overall indicator remained stagnant, held back by gasoline prices. Despite some ups and downs in recent months, inflation has significantly stabilized compared to its highest level in 40 years reached last year. However, Jerome Powell repeatedly emphasized that the central bank could raise interest rates if necessary. It is worth noting that inflation remains at 4.1%, double the central bank’s target. During the last FOMC meeting, the Fed anticipated reaching this target in 2026.
The modest rise in inflation reflects an increase in rents, personal care products and services, and health insurance due to a methodological change in how the government calculates it. At the same time, airfares and used car prices have declined. Excluding housing and energy, the cost of services increased by 0.2% compared to September and 3.7% compared to a year ago, the slowest growth in nearly two years.
Unlike services, a sustained drop in the prices of goods has relieved consumers in recent months. Nevertheless, household budgets remain tight in many ways. Food prices have risen the most since July, reflecting increases in basic commodities like meat, milk, and bread. Car insurance has also increased.
After adjusting for inflation, wages increased for the first time in three months in October. Given the easing of price pressures, this could offer some relief to President Joe Biden, whose approval ratings are at their lowest level in over a year.
If U.S. lawmakers fail to avert a government shutdown by the end of the week, Tuesday’s release could be the last reference inflation report that economists and private sector decision-makers will have access to for some time. The BLS, along with other agencies like the Bureau of Economic Analysis and the Census Bureau, will halt their publications in the event of a shutdown.
The market has dramatically overestimated these figures with optimism bordering on euphoria. The global Bloomberg Bond Index jumped 1.3% on Tuesday, the most significant one-day gain since March. The indicator, which was down 3.8% on the year less than a month ago in the context of rising long-term rates, has almost erased its losses. U.S. two-year yields fell by 20 basis points after the data was released, while Germany’s yields dropped by nine basis points.
The figure for U.S. inflation has led investors to abandon bets on any further Federal Reserve interest rate hikes and to increase bets on lower borrowing costs. Traders are now betting that weak growth combined with a generation’s most pronounced tightening cycle will push central banks towards rate cuts in 2024.
Regardless of what the Fed says about keeping rates higher for longer, the market is betting that the U.S. central bank will begin a gradual easing cycle in the first half of 2024. Markets anticipate a rate cut of more than half a percentage point by July, roughly double the amount expected at the end of October.
As we approach a challenging 2024, the dichotomy between the Fed and an overly optimistic market reappears. The market was wrong throughout 2023, anticipating a rate cut in the year’s second half. We end the year where we started: a market telling us that rates will fall and a Fed explaining that, at best, they will remain high for a long time.