Investors have been celebrating recent inflation data, which showed both consumer and producer prices rising by less than expected in October. But it would be wise not to get carried away by a single month’s numbers. As markets ponder the Federal Reserve’s next move, it’s too soon to be sure that the pace of monetary tightening can be safely scaled back.
Q3 2022 hedge fund letters, conferences and more
Consumer prices rose 7.7% in the year to October, down from 8.2% in September and the peak of 9.1% June. The new rate is the lowest since January, before Russia’s war on Ukraine roiled global energy and commodity markets. Stripping out the cost of energy and food, so-called core CPI inflation is lower, and also falling — to 6.3% from 6.6% in September. The report made investors more confident that the Fed’s next hike in interest rates will be only 50 basis points, ending its recent run of 75-point increases.
A similar story prevailed with data released Tuesday. The producer price index rose by 8% from a year ago, the smallest annual gain in more than a year and less than the 8.3% economists had been expecting. It was up just 0.2% from the previous month, compared to an expected 0.4%.
All good news. But there are reasons for caution nonetheless. Inflation numbers are volatile and a short run of figures doesn’t make a trend. The slowdown in price increases was pretty broad-based, which is good, but it was helped by a sharp decline in the medical-insurance component, which was distorted by the pandemic. Before the Fed makes its next interest-rate decision in December, it will have another inflation report and new information on the state of the labor market to consider. Those will shed more light on whether the path of prices has indeed turned.
