US consumer price inflation has fallen to its lowest year-on-year level since January, sending US stock index futures and government bonds rallying.
The annual pace of the consumer price index slowed to 7.7 per cent in October, down from 8.2 per cent in September, in figures released on Thursday. Month on month, the index jumped by 0.4 per cent, less than economists’ consensus forecast of 0.6 per cent.
After the data was released, S&P 500 futures surged almost 3 per cent on the prospect of slower interest rate increases by the US Federal Reserve. The yield on the two-year US Treasury note, which is particularly sensitive to monetary policy expectations, dropped to its lowest level since late October.
Trading in the futures market indicated that investors now thought a 0.75 percentage point increase in December was now less likely than they previously did.
In a further sign of easing inflationary pressures, “core” CPI, which excludes food and energy, rose 0.3 per cent from the previous month, well below the 0.6 per cent pace recorded in September. Compared to the same time last year, core inflation is up 6.3 per cent.
The inflation data, released by the Bureau of Labor Statistics, came on the heels of unexpectedly tight midterm elections that left the battle for control of Congress still hanging in the balance.
High inflation has dogged Joe Biden’s administration for the bulk of his presidential term, igniting fears of a pronounced economic downturn at some point next year as the Fed steps up its efforts to get price pressures under control.
Jay Powell, Fed chair, signalled last week that the central bank would probably need to lift interest rates to a higher level this tightening cycle than initially expected as it grapples with an economy that has proven resilient in the face of rapidly rising interest rates.
Most economists now expect the so-called terminal rate to eclipse 5 per cent next year, well above the 4.6 per cent level projected by most Fed officials as recently as September. To get there, officials have begun to lay the groundwork for smaller rate rises, having increased rates by 0.75 percentage points at each of its four previous meetings.
At the press conference that followed the November gathering, at which the Fed lifted its benchmark policy rate to a target range of between 3.75 per cent and 4 per cent, Powell said the central bank could scale back the pace of increases at the December meeting or the one after that.
While officials have previously said they needed to see a slowdown in the inflation data before they could alter course, they are now more directly taking into account how much rates have already risen this year and the fact that it takes time for those adjustments to affect the economy. As a result, less emphasis is placed on each subsequent CPI report.
“We do need to see inflation coming down decisively and good evidence of that would be a series of down monthly readings,” Powell said last week. “But I’ve never thought of that as the appropriate test for slowing the pace of increases or for identifying the appropriately restrictive level that we’re aiming for.”
He has repeatedly warned that the higher rates need to rise and the longer they stay at a level that is constraining economic activity, the greater the odds of the economy tipping into a recession. Most economists now expect a contraction next year, with the unemployment rate rising substantially above its current 3.7 per cent level.
