Just in: US inflation was lower than forecast last month, in a welcome sign that the surge in prices may be fading.
The US consumer prices index rose by 7.7% in October, down from 8.2% in September, a bigger fall than expected.
That’s the lowest annual inflation reading since January 2022 – news that will cheer the Federal Reserve and the White House in the battle against inflation.
During October alone, prices rose by 0.4%.
The Bureau for Labour Statistics reports that:
The index for shelter contributed over half of the monthly all items increase, with the indexes for gasoline and food also increasing.
Core inflation also eased back.
If you strip out food and energy, then underlying inflation rose by 0.3% in October, down from 0.6% in September.
Annual core inflation dropped to 6.3%, down from 6.6%.
With Wall Street on track for a blowout session it’s time to wrap up.
Here’s today main stories, on a busy day in which hopes have built that the worst of the inflation crisis could be over….
Prices of goods and services in the US were up 7.7% in October compared with the same time last year, a sign that inflation is slowly starting to cool after reaching decades-high records over the last few months.
The US Bureau of Labor Statistics reported on Thursday that in October, the consumer price index showed a 7.7% rise in prices over the last 12 months, a 0.5 percentage-point decrease from September, which saw a rate of 8.2%. The October inflation rate is the lowest since January, when rates rose to 7.5%.
Along with the slight cooling in the overall inflation rate, the core inflation rate, which excludes the volatile energy and food sectors, also showed a small tempering off, reaching 6.3% – a small increase compared to the core inflation rate last month.
Greg Daco of Capital Economics has a neat summary of today’s US inflation report:
It’s been an “absolutely wild week for markets”, says Matt Weller, global head of research at FOREX.com and City Index.
The surprising drop in US CPI inflation, to 7.7% year-on-year, is driving “huge moves” in the markets today, he explains:
After the soft inflation reading, traders are pricing in an 80% chance of a downshift to a 50bps interest rate hike from the Federal Reserve and a lower terminal interest rate (back below 5%).
This dovish shift has had an outsized impact on markets, with US Treasury yields falling sharply (10-year back below 4% to a 1-month low), the US dollar falling across the board, gold rocketing to its highest level since August, and US indices surging.
Government borrowing costs are falling across the board, in a boost to finance ministers including UK chancellor Jeremy Hunt.
Inflation fears are easing after US consumer prices rose by less than expected in October.
The yield, or interest rate, on 10-year UK government bonds has dropped to 3.27% from 3.45% last night, a sizeable move.
30-year gilt yields have also dropped, to 3.38%, the lowest since before the mini-budget rocked UK markets in late September.
US Treasuries are also rallying, on hopes that the Fed will ease its tightening cycle sooner than previously expected.
If UK borrowing costs remain lower, then it would reduce the size of the ‘fiscal black hole’ which the UK government will try to fill in next week’s autumn statement.
The dollar is sinking further against the pound.
Sterling has now surged by 3 cents, which would be the biggest one-day move since the turmoil of March 2020.
It’s now reached $1.167, the highest level since mid-September.
Big Tech is leading the rally, with Apple up 6.5% and Google owner Alphabet rocketing 7.5%.
The White House Council of Economic Advisers have cautioned that energy prices will remain volatile, due to the Ukraine war.
They also point out that housing costs are making an outsized impact on inflation, due to recent rises in the costs of shelter.
The drop in US inflation has driven the S&P 500 index of US stock up by 3.7% in early trading – on track for its best day in over two years.
Almost all of the 30 companies on the Dow Jones industrial average are rallying.
Salesforce.com is the top riser, up 6.5%, followed by DIY chain Home Depot (+5.4%), software giant Microsoft (+5.5%) and sportswear group Nike (+5.2%).
Technology company valuations benefit from lower inflation (it makes their future earnings more valuable today). Retailers could get a boost if falling inflation leaves people with more disposable income.
Wall Street has jumped sharply at the start of trading, as the drop in US inflation cheers investors.
The Dow Jones industrial average gained 900 points, or 2.8%, while the tech-focused Nasdaq has surged 5%.
Traders are optimistic that inflation may have peaked, meaning the US central bank stop raising interest rates sooner than feared.
Capital Economics told clients:
The better than expected 0.3% m/m increase in core consumer prices in October won’t on its own persuade the Fed to drop its hawkish stance.
But we expect this to mark the start of a much longer disinflationary trend that we think will convince the Fed to halt its tightening cycle early next year, with the policy rate peaking at 4.50% to 4.75%, and to begin cutting rates again before the end of 2023.
Stuart Clark, portfolio manager at Quilter Investors, warns that America is not out of the inflationary woods yet…. but the worst may be over:
“Inflation in the US has once again fallen, giving some momentum to the idea that the worst is now behind us. The rate is lower than expectations and this will provide some relief to consumers and the wider market, however it is worth noting food and shelter is still increasing, so not completely out of the woods yet.
Inflation also remains stubbornly high, however, and as such the Federal Reserve is going to remain in a hawkish mood for some time to come.
The jobs market remains strong, so for as long as inflation is this elevated and the economy doesn’t completely grind to a halt, the market will have to wait for any indication of a pivot or pause from the central bank.
Wall Street futures have surged, with the Dow Jones industrial average on track to open 800 points higher, a gain of over 2%.
European investors have joined the party too, with the FTSE 100 index of blue-chip shares up 80 points or 1.1% in London.
Today’s US inflation figures confirm suggestions that the peak may be disappearing down the rearview mirror, says Neil Shah, executive director at Edison Group.
But even so, the Fed may eventually raise interest rates to 5% to squeeze out inflation (the current rate is 3.75-4% — the highest since early 2008).
At the same time, stubborn core inflation persists and continuing reports of a tight labour market will fuel wage inflation, pointing to a longer-term and more entrenched inflationary challenge for both fiscal and monetary policymakers.
As Fed chair Powell alluded to at November’s meeting, the FOMC’s December decision may well be a 0.5% hike, yet the higher than expected terminal rate of over 5% will still be a tough target for global markets to digest.