Hallelujah

Markets were handed the first piece of good inflation news in months on Thursday, when US CPI figures for October came in cooler than expected.

Core prices rose just 0.3% from September last month, well below the 0.5% increase consensus expected (figure below).

Headline price growth was 0.4% MoM, also below estimates. Economists expected the all items gauge to post a 0.6% monthly increase.

The data came as a relief to anxious markets, which sold off sharply Wednesday following inconclusive election results in the US, and a new round of existential turmoil in the crypto space.

Market implied expectations for peak Fed funds moved decisively above 5% in and around the November FOMC meeting, after which Jerome Powell indicated that although the Fed is likely to dial down the pace of rate hikes as soon as next month, officials expect rates will ultimately have to go higher than projections released in September suggested.

On a 12-month basis, core prices rose “just” 6.3% last month, Thursday’s data showed (figure below). Needless to say, that’s still wholly unacceptable from a policy perspective, but markets will certainly take it.

At 7.7%, headline prices rose at the slowest YoY rate since January. October was the first 7-handle print in eight months.

Shelter prices accounted for more than half of the all-items increase. The 0.8% monthly rise on the shelter gauge was the largest since August of 1990 and before that, May of 1985 (figure below).

The housing market is in the early stages of what some believe will ultimately be a historic shakeout, but any relief on prices will take months to show up in the inflation figures. In that sense, the Fed is effectively driving through the rearview mirror, a precarious operational bent to which they’re no strangers.

OER rose at a less aggressive monthly pace in October compared to the prior month’s scorcher, but the YoY print, 6.9%, looked like a record.

Similarly, the 12-month rate of increase on the rent of primary residence gauge was 7.5%. To find a comparable reading, you’d have to travel back to 1982.

Again, any relief on the housing front will come on a lag, as illustrated poignantly by the familiar figure (below), updated with Thursday’s CPI measures.

The pace of US home price increases is decelerating at the fastest rate on record. So, relief is ostensibly coming. It’s just a matter of waiting it out.

As for the other things consumers need in addition to a place to live, grocery inflation abated materially.

The food at home index increased 0.4% in October from September, the slowest monthly pace since December, and before that, August of 2021 (figure below). Grocery bills are still rising at a double-digit annual rate, though.

Electricity prices, meanwhile, barely rose last month. The 0.1% gain was among the slowest seen over the last two years.

Taken together, cool reads on monthly grocery and power prices constituted a sigh of relief for weary Americans, although, again, both power and grocery bills are still growing at an entirely unacceptable pace when measured against last year.

There was great news for Americans who may be pondering an exciting new life as a vagabond after being evicted for not paying sky-high rents. Used car prices tumbled 2.4% MoM, among the largest monthly declines going back a half century (figure below).

Analysts and economists have pointed to rapid declines on a key gauge of used vehicle prices as a likely source of inflation relief going forward, even as the same dynamics imperil the fortunes of companies like Carvana, which plunged to a new record low earlier this week. (Its market cap has collapsed to just $1.3 billion from over $60 billion.)

Elsewhere, apparel costs dropped 0.7% MoM, the most since April, the medical care services index snapped a long stretch of monthly gains to fall 0.6% and the natural gas gauge fell.

If you don’t count shelter (which I realize sounds patently absurd, but you have to consider that no one expects meaningful improvements on the shelter components in the very near-term), October’s CPI report was good news.

It also made the case for a step-down to 50bps Fed hikes in December, with the caveat that policymakers will receive a copious amount of new data between now and the final meeting of 2022.