CPI inflation plunges; S&P 500 futures rise, but will the Fed care?

CPI inflation fell faster than expected in November, as did core inflation, which excludes food and energy. S&P 500 futures opened early on Tuesday action on the stock market as investors weighed what it means for tomorrow’s Fed meeting.


CPI inflation fell six-tenths of a percent from 7.7% in October, falling short of Wall Street’s expectations of 7.3%. Annual gains of 7.1% were the lowest in a year. The consumer price index increased by 0.1% month on month versus the expected increase of 0.3%.

Core CPI rose 0.2% from October. Economists had expected a monthly increase of 0.4%. Annual core inflation fell from 6.3% to 6%. Core CPI inflation hit a 40-year high of 6.6% in September.

The Fed has indicated it will taper the pace of rate hikes at tomorrow’s meeting, with widespread expectations of a rate hike of half a point to a range of 4.25% to 4.5%. However, it is unclear to what extent November’s CPI inflation report will affect the rate hike prospects the Fed will outline in new economic projections and will chair Jerome Powell’s press conference.

US economy, S&P 500 facing hard landing – unless the Federal Reserve does

Goods versus Services expenditures

Commodity price inflation, excluding food and energy, has slowed from double-digit increases earlier this year. That progress continued into November. Core goods prices fell 0.5% this month. That brought year-on-year inflation from 5.1% in October to 3.7%.

Inflation in non-energy services prices, which affects 56% of consumer budgets, is still not abating, rising 0.4% month on month and 6.8% year-on-year versus 6, 7% in October.

S&P 500 Response to CPI Report

S&P 500 futures rose 3.1% after the CPI report. Dow Jones futures rose 2.4%. Nasdaq 100 futures rose 4.2%.

The latest S&P 500 rally from mid-October lows received a jolt of energy on Nov. 10, when unexpectedly subdued CPI inflation data raised hopes that the Fed could taper rate hikes before they collapsed the economy.

That basic narrative hasn’t changed, but Fed chief Powell has tried to rein in the bulls by signaling that interest rates will have to rise further and remain restrictive until wage growth slows significantly. That’s why the S&P 500 has been restrained since November’s jobs report showed wage growth accelerating to 5.1%.

Through Monday’s close, the S&P 500 is up 11.6% from its Oct. 12 low, but still 16.8% off its high. The Dow Jones Industrial Average is up 18.4% from its bear market low to within 7.6% of its all-time high on Jan. 4. The Nasdaq is up 8% since its October 14 low, but is still 30.6% below its all-time high.

According to CPI data, the 10-year Treasury yield fell 14 basis points to 3.47%.

The CME Group’s FedWatch page shows a 58% chance that the Fed will switch back to a quarter-point rate hike on Feb. 1.

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Details of the CPI inflation report

Prices for used cars and trucks fell 2.9% this month and are now 3.3% below levels a year ago. Prices for new vehicles were unchanged from October, while the annual price increase slowed from 8.4% in the previous month to 7.2%.

Energy prices fell by 1.6% month on month, while rising by 13.1% from a year ago.

Food prices rose 0.5% this month, while the year-on-year increase slowed to 10.6% from October’s 10.9%.

The rental index rose by 0.8% month-on-month and by 7.2% year-on-year, the largest increase ever recorded.

Transport prices fell 0.1% this month, up 14.2% from a year ago.

Prices of medical services fell 0.7% in November, while rising 4.4% from a year ago.

Fed has new key inflation rate

While markets were surprised by how weak CPI was in November, everyone expects inflation to come down pretty quickly, including the Fed.

Powell gave practically an entire speech on Nov. 30 to convince investors — and soft-spoken Fed members — to see through the expected slump in the inflation rate.

There’s one key inflation rate to track, says Powell. It’s not the CPI, or even the core CPI. He also diverted attention from the Fed’s usual focus: the core personal consumption expenditure (PCE) price index.

The key to Fed policy should be core PCE services minus housing. Powell noted that core commodity price inflation is slowing down and said the same is likely for housing inflation in 2023 given market rents are stalling. But inflation in non-energy services, excluding housing, is likely to remain high as long as wage growth remains high.

Bottom line: Fed risk is certainly not off the table. Don’t rule out a continued Santa rally for the S&P 500. However, keep in mind that it could come to an abrupt end if the next jobs report shows strong wage increases in early January.


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