Inflation slows sharply, core at 2-year low; Fed rate cut seen more likely

Core consumer price pressure fell to a 2-year low last month as headline inflation continues to slow amid the Fed's rate hike run.

Nov 14, 2023 - 19:30

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Inflation slows sharply, core at 2-year low; Fed rate cut seen more likely

Updated at 8:45 am EST

U.S. inflation pressures slowed again last month, Commerce Department data indicated Tuesday, with core consumer prices falling to a fresh two-year low and challenging the Federal Reserve's near-term rate hike forecasts.

The headline consumer price index for October was pegged by the Commerce Department at 3.2%, well south of the prior month's tally of 3.7% and inside Wall Street's 3.3% forecast, powered in part by falling oil and energy prices. On a monthly basis, the index showed inflation was unchanged from September, down from the 0.4% pace recorded last month and the 0.6% gain tallied in August.

So-called core inflation, which strips out volatile components like food and energy, slowed to 4.0%, the lowest in two years, while the monthly reading of 0.2% matched also came inside Street forecasts.

U.S. stocks moved higher following the data release with futures tied to the S&P 500 priced for a 52 point opening bell gain and those linked to the Dow Jones Industrial Average gaining 323 points. The tech-focused Nasdaq was called 245 points higher.

Benchmark 10-year Treasury note yields were marked 13 basis points lower at 4.498% while 2-year notes were pegged at 4.891%, around 13 basis points lower from prior to the data release.

The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.55% lower at 105.082.

The Fed lifted held its benchmark lending rate to between 5.25% and 5.5% for the second consecutive meeting earlier this month, after ending its streak of twelve hikes over sixteens months, but warned that stubborn inflation pressures would likely require at least one more increase between now and early next year.

CME Group's FedWatch is now pricing in no chance that the Fed will lift the benchmark federal-funds rate by a quarter-point, to between 5.5% and 5.75%, when it meets next month in Washington. The odds of a hike in January were slashed to 6.2%.

Bets on a March rate cut, meanwhile, leaped to 25.1% , up from just 10.1% prior to the release, with the odds of a reduction in May pegged at 45.3%.