Consumer prices continued to climb in October, as the pace of headline inflation remained at the level reached a month earlier and core inflation excluding food and fuel slowed.
The Labor Department’s consumer price index rose 0.4% from the previous month. Compared to 12 months ago, the CPI is up 7.7%.
Core consumer prices, a key measure of inflation that excludes food and energy, rose 0.3 percent from September and are up 6.3 percent over the previous year.
Economists had expected the CPI to rise 0.7% monthly. Prices are expected to rise 7.9% from a year ago. Core prices rose 0.5% for the month and 6.6% for the year.
Equity futures rallied after October inflation figures were released. Prior to the release, futures indicated that the Dow Jones Industrial Average was expected to rise about 50 points. After the release, futures implied that the Dow Jones would climb almost 800 points.
Inflation cooled considerably in July, with the CPI unchanged from June, its smallest increase since 2020. This prompted many to declare that inflation had peaked and inspired hopes that the rapid price increases that have beset the economy since last year may be in the rearview mirror. . However, inflation accelerated in August and September, dashing these hopes. In September, the CPI was up 0.4% for the month and 8.2% from a year earlier.
Core prices rose 0.6% in September from August and 6.6% year-on-year. Thus, the pace of core inflation slowed in October.
The pace of food inflation has also slowed. The home-use food index rose 0.4% in October and 12.4% from a year ago. The index that tracks the price of dining out rose 0.9% for the third month in a row. Compared to a year ago, out-of-home food prices increased by 8.6%.
The housing index rose 0.8% from the previous month and contributed more than half of the broad index’s monthly increase. The energy index rose 1.8% during the month as the gasoline index and the electricity index rose, but the natural gas index declined.
Used car prices fell 2.4%, the fourth month of falling prices. Compared to a year ago, used car prices are up 2%. New car prices rose 0.4% and 8.4% from a year ago.
Clothing prices fell 0.7% after falling 0.3% in September. Compared to a year ago, clothing prices rose 4.1%.
Prices in the non-energy services sector rose 0.5% and are up 6.7% from a year ago.
Federal Reserve officials have raised interest rates since March, including four consecutive increases of an unusually high 75 basis points. That took the Fed’s benchmark rate from near zero to just under four percent.
Prior to the CPI release, the Fed Funds futures market indicated that investors were nearly evenly split on whether the Fed would announce a small 50 basis point hike at the December meeting or keep the momentum going with a another 75 basis point hike, each with a nearly 50 percent chance of occurring. After the CPI was released, the odds shifted to significantly favor the smaller upside. At 9 a.m., the fed funds futures market implied 80 chances of a 50 basis point rise.
The Fed targets the overnight rate that banks pay each other to borrow reserves and also pays banks interest on the reserves they hold. Since longer-term yields reflect the expected path of short-term rates, Fed tightening has pushed them higher, raising borrowing costs for the government, homebuyers, consumers and companies. The yield on 10-year Treasury bills has fallen from around 1.5% at the end of last year to around 4.1% today. The average 30-year fixed rate on mortgages more than doubled, from 3.2% to 7.5%. Yields on riskier corporate junk bonds have risen from 4.35% at the end of last year to 9.15% today, according to an index maintained by Bank of America.
Yields move in the opposite direction of bond prices, meaning bondholders have suffered significant losses from these rapid changes. Stocks are also down sharply, in part because investors discount future cash flows more when interest rates are higher. Additionally, investors fear that the Fed’s tightening campaign could push the US economy into a recession that will hurt corporate earnings. As bond and stock prices fall together, investors’ traditionally diversified portfolios have suffered unusually large losses this year.