Inflation data released by the Labor Department shows that consumer prices in October rose by 2.6% year-over-year, slightly faster than the 2.4% increase observed in September. This uptick was anticipated by economists, as was the 3.3% rise in core prices, which exclude volatile food and energy costs to provide a clearer picture of long-term inflation trends.
Both inflation measures were aligned with expectations from economists polled by The Wall Street Journal, prompting a modest rise in the Dow Jones Industrial Average in early trading, while the S&P 500 and Nasdaq Composite fell slightly. Treasury yields dipped after a sharp increase on Tuesday, suggesting that traders had braced for a potentially higher-than-expected inflation report.
This report, coming right after an election marked by public concerns over inflation, sheds light on the economic climate President-elect Trump will inherit. Consumer prices are approximately 20% higher now than when President Biden took office, a point of contention for many voters. Although inflation has shown signs of cooling, Trump’s administration will need to carefully manage economic policies to foster growth without reigniting inflation. Investors appeared reassured by the report, likely relieved that there is room for cooperation between Trump and the Federal Reserve. Some economists caution that certain policies Trump has proposed, such as higher tariffs, could push inflation upward.
“Inflation data trending high might have soured market views on Trump’s reflationary approach,” strategists at Evercore ISI commented on Wednesday.
On a monthly basis, overall prices rose 0.2% in October, with core prices increasing by 0.3%. While part of the annual inflation rise is due to tougher comparisons with last year’s data, specific items also saw significant price increases. For example, used car and truck prices rose 2.7% from September, and airline fares jumped 3.2%.
Despite a dip in gasoline prices, overall energy costs remained steady due to rising electricity and natural gas prices, balancing out the declines at the pump.
Wednesday’s inflation report boosted market expectations of a Fed rate cut in December, with traders now seeing an 80% chance of a quarter-point reduction, up from 60% before the report. The Fed’s December decision is likely to be influenced by both the upcoming consumer inflation report on December 11 and the November jobs report on December 6. Should these reports signal robust economic activity, the Fed may choose to pause further rate cuts.
Fed officials have indicated they aim to slow the pace of rate cuts going forward, perhaps moving to an every-other-meeting schedule. This measured approach would allow the Fed to make policy adjustments cautiously, guarding against cutting rates too low and potentially having to reverse course later.
