Last week’s October inflation report created a surge of optimism about the future. Traders enthusiastically embraced signs of slowing inflation and went on a buying frenzy that created significant one-day gains last Thursday.
Bond traders were happy that the Federal Reserve may not have to raise their overnight interest rate as much as they had projected.
Stock traders were happy that the Federal Reserve may not cripple the economy to stamp out inflation. They are hoping that a “soft landing” may still be possible. Additionally, the U.S. dollar declined in value which benefits U.S.-based global companies and U.S. investors as international profits convert into more dollars.
Directionally, the headlines of the report included good news – year-over-year inflation was up only 7.7% over the last 12 months. This is a significant decline from the 9% inflation reported for the 12 months ending in June.
However, the numbers behind the headlines hint that American families may still have some challenges ahead.
First, food inflation remains persistently high – rising another .6% in October for a total of 10.9% over the last 12 months. The good news is that this is the smallest monthly increase since December 2021. The bad news is that many families are being forced to spend a significantly higher percentage of their income on food.
Second, shelter inflation (rent and homeownership) is accelerating. Shelter makes up about 33% of the inflation calculation, and over the last 12 months it is up 6.9%. However, it increased by .8% in October which is the largest monthly increase since April 1990. If shelter inflation continues to rise at this rate, headline inflation could remain stubbornly high.
Third, energy inflation remains stubbornly high at 17.6% over the last 12 months. This includes a 68.5% increase in fuel oil as winter approaches. Families are paying a higher percentage of their income for energy.
Combine all three of these factors, and American families may not be celebrating this inflation report quite as much as the financial markets.
If you are looking for really good news on the inflation front, the prices for beef, televisions, computers, smart phones, and tickets to sporting events have actually declined over the last 12 months.
While the October inflation report created significant upside volatility in the financial markets last week, the path ahead is still very uncertain. Embrace cautious optimism but be prepared for setbacks along the way.
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