Why the Latest Inflation Report Has Wall Street Feeling Great

Cost is relative, but by almost every measure we live in expensive times. Food is about 25 percent pricier than it was in March 2020. In New York City, the average cost of rent is more than 50 percent more than it was three years ago. The Federal Reserve has jacked up interest rates to their highest level in 22 years, raising the cost of everything from mortgages to credit-card debt. This has been the grinding reality since April 2021, when inflation started moving higher than it had in decades and has stubbornly stayed elevated ever since. Had salaries also shot up, these costs would all have been manageable — except they didn’t. The key problem for most people today is being able to afford the life that they lead. But there appears to be good news. Last month, the Consumer Price Index, which is the broad measure of inflation in the U.S. economy, was very slightly negative in October, mostly thanks to a large drop in the price of oil and gas. The annual inflation rate fell to 3.2 percent, the lowest it’s been since March 2021, save for a single outlier month earlier this year. Should this trend hold, this could mean that the grim post-pandemic affordability crisis that has marred this economy could be winding down.

Inflation reports are snapshots in time, a read on what the cost of living was like for most people during any given month. What marks this most recent CPI report as being especially important — probably the most crucial in the last year — is how the Fed will use it when they decide next month whether to raise interest rates one more time. Last December, the central bank started to slow down on its historically aggressive campaign to keep prices rising. There have been a few small increases in the interest rate since then, but Chair Jerome Powell has held rates steady since July. Had the inflation rate come in higher, the Fed would have been more likely to hike rates one more time. Now, that is unlikely. The next question on the minds of economists is how much longer the Fed will try to keep rates steady before cutting them down again.

The October payroll report and inflation report strongly suggest the Fed's last rate rise was in July.

The big debate at the next Fed meeting is shaping up to be over whether and how to modify the postmeeting statement to reflect the obvious: the central bank is on hold.

— Nick Timiraos (@NickTimiraos) November 14, 2023

Still, it’s too early to declare victory. Inflation is a phenomenon notoriously susceptible to vibes and other less-than-tangible variables. Among Americans, pessimism about the economy is rampant — including that inflation will remain a problem. Under the right conditions, these expectations actually contribute to a return of inflationary dynamics. Quincy Krosby, chief global strategist for LPL Financial, noted that consumers felt worse about the economy last month, particularly younger and poorer people, and highlighted the danger of an economic feedback loop. If enough people expect the cost of living to keep going up, businesses could feel freer to keep raising prices. “Their expectations need to be firmly anchored before the Fed can be assured that their job is completed successfully,” said Krosby.

So what happens now? After a year in which recession seemed improbable, and then inevitable, Wall Street is back to projecting that it’s all going to be okay in the end. (Well, not everyone.) Goldman Sachs thinks that wages will grow next year, inflation will continue to fall, and the Fed will cut rates at some point after June. Of course, anything could happen. Should the economy take an unexpected turn, and inflation heats up again, the Fed could turn around and raise rates again — Powell said as much during a press conference earlier this month. Should things stay relatively calm for the next few months, though, pretty soon you could start to afford the cost of living again.