Bond Yields Drop, Stocks Rally on Tame CPI
2min read The October CPI data released today showed inflation figures largely in line with market expectations, calming concerns about a potential upside surprise. Headline CPI rose by 0.2% month-over-month (MoM), the same increase as in September, bringing the year-over-year (YoY) rate to 2.6%, slightly up from 2.4% in the previous month. The core CPI, which excludes food and energy, climbed by 0.3% MoM and held steady at 3.3% YoY. These consistent monthly increases provide reassurance that inflation remains on a stable path, giving investors confidence in a steady cooling trend.
Shelter costs, a significant contributor to inflation, rose by 0.4% in October, maintaining their role as a primary driver of core CPI. Shelter alone accounted for over half of the all-items increase, as both rent and owners' equivalent rent continued to rise. Despite its still-elevated level, shelter inflation is moderating from previous highs, though it remains a lagging indicator. This ongoing reduction in shelter inflation should help keep headline CPI stable in the coming months as it catches up with softer rental market trends.
Food prices edged up by 0.2% in October, a slowdown from the 0.4% increase in September, with food-at-home prices rising by just 0.1%. This deceleration in food inflation will likely ease pressure on household budgets, especially compared to earlier in the year. Energy prices were flat for the month, contrasting with the prior month’s 1.9% decline. Gasoline prices, in particular, were down 0.9% MoM, reflecting lower global oil prices. However, electricity prices increased by 1.2%, contributing to the stable energy index.
Other key categories revealed mixed inflationary pressures, with some sectors like used cars and trucks (+2.7% MoM) and airline fares (+3.2% MoM) showing significant monthly increases. Meanwhile, medical services saw a modest increase of 0.3%, and personal care and education indices also experienced minor gains. On the other hand, declines were observed in apparel (-1.5%) and communication (-0.6%), with both categories softening overall CPI. These fluctuations highlight the uneven recovery across sectors, with certain consumer costs showing volatility.
The report’s alignment with forecasts eased investor concerns, spurring a rally in equities as fears of a "hot" inflation reading were put to rest. Yields on U.S. Treasuries also declined following the data release, with expectations for a December rate cut by the Federal Reserve rising from 60% to 75%, according to CME’s FedWatch Tool. This increased probability of a rate cut suggests that investors see the current inflation path as manageable, with the Fed potentially easing policy sooner than previously anticipated.
Two critical measures—“Super Core” inflation (core services excluding shelter) and sticky CPI (which includes items that change prices infrequently)—both showed signs of easing in October, a development that is likely to be well-received by the Fed. Super Core’s moderation is essential for the Fed’s inflation outlook, as it indicates that price pressures are not widespread across services. Sticky CPI, which tends to reflect longer-term inflation expectations, has also come down, suggesting a more stable inflationary environment that could support Fed easing.
Overall, the October CPI report provides a cautiously optimistic outlook for inflation, reinforcing the view that inflationary pressures are stabilizing. With shelter inflation easing and other core components remaining relatively contained, the data suggest a gradual return to the Fed’s 2% target may be achievable without aggressive tightening. This aligns with market sentiment, which has responded favorably, and sets a constructive tone heading into the end of the year. However, the Fed will continue to monitor inflation closely, especially given potential geopolitical and fiscal uncertainties that could alter the economic landscape.
