Stocks and bonds both rallied this week after Thursday’s release of the October Consumer Price Index, which was better than expected at ‘only’ 7.7% year over year. As we have written previously, inflation is the most critical economic factor to watch. While 7.7% is still uncomfortably high, the October inflation figure was down from September’s 8.2%, and lower than the 7.9% market expectation, giving the market a reason to celebrate.
The S&P 500 index was up 5.9% for the week, punctuated by a 5.5% one day gain on Thursday after the release of the inflation data. While significant risks remain, the market was relieved to see that the Fed’s interest rate increases were finally having an affect on inflation. It is increasingly likely that inflation peaked in June of this year at 9.1%. Falling inflation signals that the Federal Reserve’s interest rate hikes are having an impact and may end sooner rather than later. That said, it is still likely that the Federal Reserve will increase the Fed Funds rate by .50% or .75% in December. However, the October’s lower inflation number could allow the Federal Reserve to pause at that level.