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What does today's CPI mean for the Fed?

An Analysis of the October 2023 CPI Inflation report and the Market Outlook

We were all wrong about inflation. Actual numbers came in far better than anyone expected. I’ve updated the chart from Breakfast Bites this morning to reflect the actual numbers.

This is certainly a good result and much of that decline in Headline inflation was indeed driven by the Energy prices. Overall, Energy prices decline by -2.5% MoM which brought the yearly number down to -4.5% YoY for Energy.

The other issue - Health Insurance - came in higher just as expected. Most banks however were projecting an increase at 0.8% to 1% per month while the actual increase came in at +1.1% MoM.

Alongside that, we’re also seeing Motor Vehicle insurance increase again from 1.3% MoM in September to 1.9% in October.

Vehicle prices - new and used - declined as well. This is a welcome sign and something we were worried about given the UAW strikes and lack of production in the past couple of months. The Manheim Used Car Index tends to lead the CPI for Used Cars by about 2 months so we’re likely to see that spike next month. But, the spike doesn’t seem sustainable and perhaps not worth “worrying” about right now.

Source: FactSet

But our concerns about Food Inflation and Shelter Inflation were not altogether wrong. While we are seeing a decline in both of these number on a Year-on-Year basis, the rate of change remains very slow because monthly inflation is still positive and in the case of food at home (groceries) increasing.

The Fed doesn’t want to consider headline i.e., Food and Energy, because they consider those prices volatile. While I accept that for energy to a large extent, food is slightly different here.

Read on to see why we’re concerned about Food and Shelter, what this report means for the Fed and our views on the markets for the next one month.

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