Inflation slowed markedly last month on both a headline and underlying basis, the October Consumer Price Index (CPI) showed Tuesday, giving support to the view that the Federal Reserve is done hiking interest rates this cycle, experts say.
More importantly, the Fed could even start cutting rates by the middle of next year, they add.
Moderating energy prices helped October's CPI to rise by 3.2% on an annual basis, according to the Bureau of Labor Statistics. That represents a significant slowdown from the previous month's 3.7% rise in prices, and is the lowest headline inflation reading since July. Economists were looking for headline inflation to increase 3.3% year-over-year.
Inflation was unchanged on a monthly basis vs economists' expectations for an increase of 0.1%. Prices rose 0.4% in September on a monthly basis.
Core CPI, which excludes volatile food and energy prices and is considered to be a better predictor of inflation, increased 4% over the past 12 months – the slowest rate since September 2021. Economists forecast core CPI to rise 4.1% annually. October's 0.2% increase in core CPI beat Wall Street's 0.3% estimate.
The latest inflation data should allow the Federal Open Market Committee (FOMC) to keep interest rates unchanged once again at the next Fed meeting. Interest rate traders currently assign a 95% probability to the FOMC leaving rates unchanged at a target range of 5.25% to 5.5% when it concludes its December policy meeting, according to CME Group's FedWatch Tool.
What's more interesting, experts say, is the way the market is increasingly betting on rate cuts by the middle of 2024.
With the October CPI report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
Expert takes on the CPI report
"Today's CPI report is more good news for the Fed, markets and consumers. The trend lower is in place and this should increase Fed Chair Powell's confidence that the Fed does not need to raise rates again. When combined with the weaker-than-expected employment report, we can see the Fed's actions are having an impact. The 'soft landing' scenario remains intact. And while inflation readings remain above the Fed's stated 2% target, there should be less need for the Fed to consider additional monetary tightening. We are not talking about the Fed lowering rates yet, but the path we are on is leading in that direction." – Steve Wyett, chief investment strategist at BOK Financial
"Softer-than-expected CPI data has traders repricing probabilities for the FOMC's next move as today's inflation reading supports the view that rates have peaked and the FOMC will need to begin easing sooner rather than later. At close of business yesterday, December FOMC rate hike probabilities were at 15%, while we are now at 0% chance of a hike. The narrative has now shifted towards 2024 as to when the first rate cut will come with the market pricing in a 75% chance of a cut in May 2024 and pricing in more than one quarter-point rate cut in June 2024." – Victor Masotti, director of repo trading at Clear Street
"This is the CPI report that is going to trigger serious talk about potential rate cuts in the first six months of next year." – Sonu Varghese, global market strategist at Carson Group
"October CPI readings were obviously helpful to the Federal Reserve. They have been in a pause since July on the theory that the policy lags would feed through. Today's CPI validates that 'wait-and-see' approach. On the other hand, it will take a rather long series of this order of magnitude to give them confidence to ease policy. We worry that the recent easing of financial conditions and energy prices could easily start to counter the restraint. We went to a full weight in fixed income duration as the 10-year U.S. Treasury approached 5% on a fundamental valuation basis. Today's CPI makes that a more comfortable hold." – Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co.
"October's softer-than-expected CPI print is an encouraging development for the FOMC and reinforces our view that the FOMC has ended its hiking cycle. But, we do not see the latest data as a game-changer for inflation's path ahead. With inflation in October held down by volatile components like gasoline, travel services and autos, we expect inflation's return to 2% will continue to be a slow grind." – Sarah House, senior economist at Wells Fargo Economics
"In October, the CPI held constant, meaning month-to-month inflation was 0%. Year-over-year inflation was 3.4%. The core CPI, which excludes food and energy, rose 0.2% from the previous month. Much of the inflation in the core measure comes from shelter, which is calculated with lagged rent surveys. If we use more up-to-date rent measures, inflation is closer to the Fed's 2% target. While the Fed can take heart with this month's CPI, it should still be concerned that total spending – or nominal GDP – is still well-above historical trends. If nominal spending growth does not slow sufficiently, higher inflation could make a comeback." – Patrick Horan, macroeconomist at the Mercatus Center at George Mason University
"The CPI was clearly a positive for market risk this morning. Numbers came in cooler than expected. The chances of near-term rate hikes fell to near zero while the possibility of interest rate cuts rose. The 10-year Treasury plunged along with the dollar while stocks surged with small cap stocks outperforming. Areas of the market that have been hit the hardest are generally the strongest names today while some stocks that have outperformed recently are underperforming today. Consumer discretionary, one of the weakest areas over the last few months, is very strong today and outperforming, while energy, one of the strongest sectors, is up but underperforming today. We believe that the lower CPI today will enable risk assets to outperform through year-end." – Eric Green, chief investment officer at Penn Capital Management
"With aggregate labor income slowing, there will be more confidence among Federal Reserve officials that price growth is on a sustainable path back to target. NAFCU expects these conditions to place the Federal Reserve on track to commence rate cuts in the second quarter of 2024, with an outside chance of earlier if unemployment continues to rise." – Noah Yosif, economist at the National Association of Federally-Insured Credit Unions
"Inflation this morning came in lower than expectations, both on headline and core (excluding food and energy) and on a month-over-month and year-over-year basis. Inflation continues to come down, accompanied by slower job growth in recent months. This orderly slowing of the economy is consistent with the Fed's objectives in raising short-term rates and a durable post-pandemic economic expansion." – David Royal, chief financial and investment officer at Thrivent
"After a summer panic in interest rates and oil prices, the inflation narrative is quickly unwinding. Today's CPI showed more improvement on key areas like shelter and car prices. It's the latest item in a flood of good news hitting the market in November. A soft landing and permanent Fed pause look increasingly likely, which would lay the groundwork for a strong year end. Santa could be coming to town." – David Russell, global head of market strategy at TradeStation
"Today's headline CPI print slightly beating analyst expectations likely does little for the Fed by way of input to their decision for next steps. A heavy portion of the headline number's decline was due to oil and electricity prices sharply declining in October, while other mainstays of the composite remained elevated above the Fed's target." – Ben Vaske, senior investment strategist at Orion Portfolio Solutions
"The 4% core reading is the smallest since September 2021 and shows inflation continues to move in the right direction. Even so, inflation remains considerably higher than the Fed's 2% long-term target. We continue to believe that the FOMC is done with rate hikes for this year, but the markets might be overly optimistic about the possibility of rate cuts as early as next Spring given the economic backdrop." – Austin Schaul, head of research at Avantax
"The sharp moderation in both headline and core CPI inflation in October is an important step in the Fed's goal of returning inflation to its 2.0% target on a sustainable basis. But, the heavy reliance on volatile gasoline and energy price declines for much of last month's improvement will still keep the Fed from declaring total victory. We are encouraged to see the moderation in the core and super-core measures of inflation in October as well, but we will need to see further improvement in the months ahead for the U.S. inflation slowdown story to remain intact and keep the Fed on the sidelines for good." – Scott Anderson, chief U.S. economist at BMO Capital Markets
"We need to see more months with soft inflation data, but the stock and bond market is celebrating today. We're set up nicely for a year-end rally." – Gina Bolvin, president of Bolvin Wealth Management Group
