October CPI Inflation and the Market Reaction: Caution is in Order

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The market’s reaction to a better-than-expected inflation reading for October should not be a surprise, although the magnitude of the reaction looks a bit exaggerated. In our Weekly Economics of September 23, 2022, just after the September decision by the Federal Reserve (Fed), we said: “the Fed has put its worst-case scenario, something that should be music to the markets’ ears.” We further said: “For the markets, this should be good news even if it is very difficult to see it at this point. Since this is the worst- case scenario for the Fed, any ‘better-than-expected’ news in the inflation front should be a boon for markets.”

But markets should understand that this was just one month of data and that we had better-than-expected numbers before this latest October number and then we saw further deterioration, so markets should be cautious. Although we had very good news from several core goods and services sectors during the month of October, transportation services still managed to increase 0.8% during the month while the all-important shelter component of the index also increased 0.8% after increasing 0.7% in September. Thus, there are sectors of core prices that are still very strong. That is, if we don’t see weakness in the rest of the sectors, as we saw in October, then the probability of higher inflation readings remains. We do know that shelter prices are going to start to weaken in the next several quarters; but, while that train has departed the station, the wagons are going to take a relatively longer time to come through.

Furthermore, the higher oil and gasoline prices story is still not over. According to the latest Energy Information Administration (EIA) estimate, oil prices are expected to remain elevated during the rest of this year and into next year so the Fed is very aware that higher oil prices could, once again, threaten their efforts of bringing down inflation. Thus, the Fed is going to be very careful to keep interest rates high for a longer timeframe in order to buy time for shelter prices to start moving lower and building a buffer against higher oil prices in the future.

Eugenio J. Alemán, PhD,
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