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Prior to 2022 and 2023, the monthly Consumer Price Index (CPI) announcements from the Bureau of Labor Statistics (BLS) were a point of interest but not a make-or-break event. However, all eyes have been on the CPI lately, and October’s print gave the financial markets a big jolt.

The October CPI announcement was particularly impactful because financial traders desperately want to know the Federal Reserve’s future plans for interest-rate policy. Throughout much of 2023, investors assumed that the Fed would not only ease up on interest-rate hikes but would actually implement rate cuts in the first half of 2024.

They watched the employment numbers and manufacturing activity for clues as to how the Fed might respond. Yet, the most important factor is inflation, and October’s CPI data could mark a turning point. Let’s take a closer look at what the numbers reveal to see if the battle to tamp down inflation is really over.

Inflation goes down, stocks go up

With the S&P 500, Dow Jones Industrial Average and NASDAQ all jumping after 8:30 a.m. Eastern time on Nov. 14, it was evident that the market approved of the BLS’s inflation data release. Indeed, the numbers were better than economists had anticipated, albeit only slightly.

However, it wasn’t as if the inflation rate crashed. According to the BLS, October’s CPI was flat month over month and increased 3.2% year over year. In contrast, economists had expected October’s headline inflation rate to rise 0.1% month over month and 3.3% year over year.

Thus, it’s fair to say that inflation was lighter than expected but just barely. On the other hand, the October inflation data indicated notable improvement over September, in which headline inflation rose 0.4% month over month and 3.7% year over year.

Some people might prefer to use core CPI, which excludes volatile food and energy prices, as their preferred inflation gauge. As it turns out, October’s core CPI increased 0.2% month over month and 4% year over year, while economists had predicted 0.3% and 4.1% gains, respectively.

It seems then that Tuesday morning’s stock rally may have been an expression of relief that inflation didn’t jump in October. However, it should be noted that oil prices substantially influenced the headline inflation numbers. Gasoline prices slid 5% in October, and investors shouldn’t expect this unusual gas-price drop to happen every month.

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Sticking to the script

As the U.S. inflation rate pulls back, it’s tempting for market participants to get complacent. However, they should continually keep the Fed’s objective, which isn’t to keep the stock market afloat.

Federal Reserve Chairman Jerome Powell has stuck to the same script, even when the market picks whichever narrative it wants to follow. Powell’s objective is to get the inflation rate down to 2%, and he’s made no bones about his determination to reach that goal even if the Fed has to slow down the economy.

It could be argued that the Fed has already slowed the economy down considerably through interest-rate hikes in 2022 and 2023. High borrowing costs have made it more difficult for businesses to get loans and pay down their debts.

Still, optimism that the pain would end soon ran high when Powell recently declared, “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.”

The Fed chairman said this after the Federal Open Market Committee (FOMC) declined to raise interest rates in early November.

Stock traders celebrated because they interpreted the phrase, “if we need to do more,” as a signal that Powell is ready to stop raising interest rates and even start cutting them soon. However, it’s possible that stock traders read too much into those six words.

It’s also worth considering that the market may be reading too much into the October CPI print. Getting the inflation rate down to 2% isn’t going to happen in the next couple of months. Nonetheless, the market is so forward-looking that traders are buying stocks in anticipation of interest-rate cuts that haven’t happened yet and might not happen for a long time.

Meanwhile, the market seems happy to ignore other data, such as October’s slump in retail sales. This is particularly alarming as the holidays are upon us, and the American consumer is supposedly what’s kept the economy afloat in 2023.

At the end of the day, it’s up to each investor to interpret the data that’s available. Just bear in mind that when the market assumes a victory that hasn’t actually occurred yet, it establishes a perilous setup for disappointment and deep financial loss.

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