Sometimes when it's not too hot and not too cold, it's 'just right.' (UBS)

Shelter remains by far the biggest driver of inflation, rising 6.7% y/y in October. Data on new rental agreements suggests that shelter inflation will slow in the months ahead, helping to bring down the overall inflation rate.

Core inflation came in at 0.23% month over month, lower than median market consensus, and equal to the average print over the prior four months. In year-over-year terms, core inflation was 4%, far above the Fed’s 2% inflation target, but the annualized run rate over the last five months has been 2.8%, a much more comfortable level for the Fed. While it is still too early for the Fed to declare victory over inflation, they now face little pressure to raise rates further.

Impact on the market?

Following the CPI report, both bonds and equities rallied.

  • Bonds rallied because lower inflation could allow the Fed to start trimming rates sooner.
  • Equities trended upward as the expectation of lower rates, potentially sooner than expected, is a positive for risk assets.

Hard-landing versus Goldilocks scenario

Academics and financial experts have been calling for a recession for over a year now. The opinion was largely based on the following logic:

“For inflation to decline, unemployment must increase.” This rationale implied that a “hard-landing” was needed in order to avoid a wage-price spiral.

Well, words more, words less: a “hard-landing” is not at all what seems to be taking place.

Indeed, the data has been clearly showing us that inflation is coming down, while at the same time the labor market is holding steady. As such, our long-held expectation of a “soft landing” is now basically the market’s base-case scenario.

Our base case remains that the Fed will not raise rates further. However, inflation is still too high and the labor market still too tight for the Fed to declare victory and announce an end to the rate-hiking cycle. In our view, such an announcement is likely to be at least three months away, unless the data takes a sudden turn toward the weaker side.

Yes, the Goldilocks path is materializing. Sometimes when it's not too hot and not too cold, it's 'just right.'

Main contributor: Alberto Rojas, Investment Communication Writer, CIO Americas

For more, see CPI slows in October , 14 November, 2023.