The US Bureau of Labor Statistics has released the consumer price index (CPI) data for the month of October, reporting core inflation of 0.3 per cent, down from a 0.6 per cent rise in September.
As a result, year-on-year inflation fell below market expectations (7.9 per cent) to 7.7 per cent, down from 8.2 per cent in September — the lowest annual inflation figure since January 2022.
This came as a pleasant surprise to global markets, with the S&P 500 and Nasdaq recording strong gains amid expectations that the Federal Reserve would ease its foot off the monetary policy pedal.
According to Callie Cox, US Investment Analyst at investment network firm eToro, these latest figures reflect “progress” towards the Fed’s inflation target.
“Inflation is moving in the right direction, and we’re seeing relief in price growth across the board,” she said.
But Ms Cox has conceded that market optimism could be premature.
“We’re wary of markets getting too far ahead of themselves here, and we don’t expect a significant rally until inflation is down significantly,” she added.
“It’s clear the Fed’s medicine is working, but it’s still worth staying defensive here while holding some quality risk.”
James Knightley, chief international economist at ING Economics, echoed this sentiment, noting that US inflation remains “well above” the 0.17 per cent month-on-month figure needed consistently over the medium term to achieve the Federal Reserve’s 2 per cent year-on-year target.
Mr Knightley said he expects the Fed to continue hiking rates over the coming months, but acknowledged the October result would be “very supportive” of a “step down” from 75 basis point (bp) increases to a 50 bp hike in December.
However, the November jobs report (to be released on 2 December) and the November CPI report (to be released on 13 December) would ultimately influence the central bank before its Federal Open Market Committee (FOMC) meeting on 14 December.
As such, the Fed is expected to be “wary” of any “relaxation of financial conditions”.
“We would expect to see some fairly hawkish rhetoric over the coming days' messaging, that while there likely will be a moderation in the size of rate hikes, inflation is not defeated so the Fed has more work to do with a higher terminal rate than it signalled in September,” Mr Knightley added.
“The Federal Reserve will not put too much weight on one month’s numbers. It wants to see a sustained moderation in monthly inflation before being confident that inflation is on track to return to target.
“The data did provide some grounds for cautious optimism that the intensity of price rises may be starting to moderate.”
ANZ Research is expecting the Fed to lift rates by 50 bps in December before two 25 bp hikes in February and March.
This would take the federal funds rate to a “peak” of 5 per cent.
