Inflation is slowing, but don’t get too excited

Markets posted some massive numbers after yesterday’s inflation report: S&P 500 (+5.5%) and Nasdaq (+7.3%). NBD.

Compared to the previous year:

• The Consumer Price Index (a measure of inflation) was up 7.7%.
• Core prices (excluding volatile food and energy) — increased 6.3% but were down from a 40-year high.

The monthly increase was 0.4% (CPI) and 0.3% (core price). All numbers were better than what economists expected.

• Shelter costs (housing and rental costs) made up more than half the CPI growth.
• The housing market may be slowing, but items like utilities, property taxes, and maintenance are driving up prices.

Come December, The Fed will increase interest rates by 0.50 percentage points or 0.75. The data allows the Fed to raise rates by a lower amount — but will they?

• Depends; we still have the November inflation report to look at before they meet in December.
• After yesterday’s data, the odds of a 0.50 percentage point rise jumped to 81%.

If they do raise by 0.50, investors may get an early Christmas present — the year-end rebound we’ve been waiting for.

Don’t let the Fed break your heart:

“One data point doesn’t make a trend. What we have to hope for is we get another downtick [in CPI] with the next report.” — Randy Frederick of Charles Schwab.