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The Federal Reserve has repeatedly reminded us that any decisions on future rate moves will be dependent on what the data says. If that is the case, then the latest inflation reports suggest the Fed may be finished raising interest rates. Inflation moderated enough in October to even cause a couple of analysts to suggest that the Fed may have been correct in calling the inflation spike “transitory.” While I may not go that far in describing inflation over the past three years, there are signs that the worst of inflation may be over. The consumer price index (CPI) was flat in October, the slowest monthly change since July 2022, and up 3.2% from a year ago, the slowest pace in four months. At the core level, which strips food and energy prices, the index was up 4.0% from a year ago, the slowest pace in over two years, and up 0.2% for the month. In fact, the pace of changes in core prices have increased more slowly for five straight months than in the previous two years.
Changes in the index were significant. Shelter, which accounts for a third of CPI and has been a leading contributor to the run-up in CPI, increased 0.3%, half the pace of September. Measures of rent and hotel costs were also lower than previous readings. Both used and new auto prices fell for at least the fourth month in a row. Gasoline prices fell 5% in October and are down 5.3% from a year ago. A welcome surprise was a moderate 0.3% increase in medical costs. Analysts had been preparing for a large jump in health care and insurance costs due to seasonal adjustments. The producer price index (PPI), the counterpart of consumer inflation, also posted some of the lowest marks in two years. While PPI usually gets a cursory glance, falling or slower rising wholesale prices should make their way to consumer pricing.
The key takeaway wasn’t so much what the inflation reports revealed but rather what the financial markets did with the news. The markets have been on edge for any sign the Federal Reserve is finished raising interest rates, ignoring anything Fed officials say to the contrary. There is no wonder stocks and bonds pounced hard on this week’s inflation data. The Dow gained over 1,000 points on the week and the S&P 500 rose almost 2% in a day. Treasury yields fell 20 basis points on average, bringing the two- and 10-year yields below key 5% and 4.50% thresholds, respectively.
Key Indicators this Week
Retail Sales – Hopefully the consumer is just waiting for larger pre-holiday sales rather than giving up on spending altogether. Retail sales fell 0.1% in October, the first decline in seven months. The bulk of the decline came from large drops in auto and furniture purchases, but more than half of the major categories posted negative sales. Personal care and grocery stores were the biggest gainers in October. Non-store retailers, a proxy for internet sales, rose by just 0.2%. Reports this week from Walmart and Target noted that consumers are feeling the weight of higher prices and becoming more cautious on discretionary spending.
Note: Behind the Numberswill not be published next week. The report will resume on December 1. On behalf of Catalyst, I would like to wish you a wonderful Thanksgiving filled with gratitude, joy and good food. The good news is the average cost of the traditional Thanksgiving meal is 4.5% lower from last year. Be thankful for the small things in life.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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