Inflation Is Rising Slower Than Expected, and Stocks Are Soaring

Getty Images
Getty Images

Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.

Goldco can help you take control of your financial future

Invest in Gold

After several months of hotter-than-expected inflation numbers, it’s nice to finally see the latest report come in cooler than anticipated. The markets certainly seemed to welcome the latest inflation report: Stocks roared ahead with massive gains early on Thursday.

For the year ending in October, the inflation rate was 7.7%, the Department of Labor said Thursday. The annual inflation rate for the previous month was 8.2%, and recent projections pegged October’s rate at 7.9%. Overall prices for consumers rose by 0.4% from September to October. This monthly rate was also lower than the forecasted rate of about 0.6%.

While the latest report signals a cooling in inflation, many prices for consumers remain stubbornly high. Gasoline prices, for example, are up 17.5% compared to last October, while groceries are 12.4% more expensive.

“This morning’s CPI [Consumer Price Index] data were a welcome relief, but there is still a long way to go,” Lorie Logan, the president of the Dallas Federal Reserve, said at a speech Thursday morning.

The Federal Reserve, the U.S.’s central banking system, has acted aggressively to curb inflation in 2022, despite the risk of driving the overall economy into a recession. So far, it has raised interest rates six times and signaled more increases are on the horizon until inflation comes down to about 2%, which is the Fed’s preferred rate.

Is the latest inflation report good news or bad news?

Economists are generally interpreting Thursday’s inflation report as a good sign.

Wendy Edelberg, a senior fellow of economic studies at the Brookings Institution, said during a panel discussion Thursday that she’s not celebrating just yet though she’s “cautiously optimistic.”

“We saw an absence of bad news,” Edelberg said. “This is the bare minimum for what we need to see to get inflation under control.”

Some economists are more optimistic than that. During the same panel, Justin Wolfers, an economics professor at the University of Michigan, said he was so excited he went for a run after seeing the report.

So is inflation up or down?

Inflation is certainly cooling, and both the annual and monthly inflation rates for October were lower than expected.

However, the reality of historically high prices still weighs heavily on wallets all across the country. Thursday’s report can be interpreted as good news for the trajectory of inflation in the long term, though everyday prices are still creeping up for consumers — albeit at a slower pace than previous months.

“Inflation is moving in the right direction, and we’re seeing relief in price growth across the board,” Callie Cox, an analyst at the investment firm eToro, said in a note shared with Money.

“Don’t get me wrong – inflation is still much too high for the Fed’s liking – but this is progress,” Cox added.

What does the new inflation report mean for stocks?

Stocks surged Thursday morning as investors assessed the CPI report that was more favorable than economists had expected, and what it means for interest rate hikes moving forward.

Rate hikes are a tool the Federal Reserve uses to try to cool inflation, but those increases can also weigh on stock prices as they make borrowing and doing business more expensive for companies. Last week, the central bank signaled that it plans to keep hiking interest rates, but suggested it could be prepared to slow down the pace depending on how the economy is doing.

Thursday’s CPI report indicates the Fed may be able to implement a 50-basis-point hike in December, Gargi Chaudhuri, head of BlackRock’s iShares investment strategy in the Americas, said via written commentary shared with Money. (The last four rate hikes have been by 75 basis points.)

Cox from eToro says that while the latest report indicates “progress,” she doesn’t expect a significant market rally until inflation is down significantly.

Stocks have been volatile for much of the year amid continued interest rate hikes, and experts say investors should brace themselves for more ups and downs.

Dollar Scholar

Still learning the basics of personal finance? Let us teach you the major money lessons you NEED to know. Get useful tips, expert advice and cute animals in your inbox every week.

Sign Up

More from Money:

The Stock Market Ultimately Doesn’t Care Who Wins the Midterms

Student Loan Forgiveness Update: What We Know Now About the Timeline and Lawsuits

How to Get a Free Turkey for Thanksgiving

© Copyright 2021 Ad Practitioners, LLC. All Rights Reserved.
This article originally appeared on Money.com and may contain affiliate links for which Money receives compensation. Opinions expressed in this article are the author's alone, not those of a third-party entity, and have not been reviewed, approved, or otherwise endorsed. Offers may be subject to change without notice. For more information, read Money’s full disclaimer.