In Reality, U.S. Inflation May Not Have Slowed as Much as Advertised

On November 10, the U.S. Bureau of Labor Statistics (BLS) released constructive Consumer Price Index (CPI) data for October. The index increased 0.4% on the month and 7.7% year-over-year, well below economists’ average estimates of 0.6% and 7.9%, respectively. The U.S. CPI for the twelve months ended September 2022 rose 8.2% comparatively.

Similarly, core CPI, which excludes volatile food and energy components, rose 0.3% in October and 6.3% for the year ended October 2022, well below consensus estimates of 0.5% and 6.5%, respectively. Core CPI for the twelve months ended September 2022 increased 6.6%.

This market-friendly data triggered a 5.5% jump in the S&P 500 Index, which represents that gauge’s biggest one-day gain since April 2020 and its largest-ever one-day gain on a CPI report day. The highest risk stocks soared even more: the NASDAQ popped 7.4% and Cathie Wood’s ARK Innovation ETF had its best day ever, exploding 14.5% higher. (Incidentally, that ETF hit a five-year low the previous day.) Investors, at least for one day, believed the pace of Fed tightening may slow and/or the ultimate magnitude of the Fed funds rate increases may be smaller than previously expected.

Investors should note, however, that, absent two unusual data points, the October 2022 core CPI would have risen about as much as it did in September 2022. If such a headline number had been printed instead of the eye-catching increase of “just” 0.3%, the equity markets would likely have reacted quite differently.

First, used car and truck prices fell 2.4% in October 2022 versus September 2022. Remarkably, this category of goods has about a 4.6% weighting in the CPI, higher than many observers would expect. Consequently, the October drop in used vehicles prices by itself accounted for the difference between a 0.3% and 0.4% monthly increase in October core CPI. A drop in used car prices over the last few months has been widely reported and should not have come as much of a surprise to market investors.

Second, the BLS updated the health insurance index data beginning with the October 2022 CPI release. According to Inflation Insights LLC, this methodology change will reduce core CPI on an annual basis by about 0.8%, or nearly 0.1% per month.

Consequently, excluding the surprisingly heavily-weighted used car prices and the change in health insurance index data, core price CPI in October would have risen by about the same amount as it did in September.   

Information for this briefing was found via the BLS and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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