The global economy is weakening and consumers are feeling financially stressed. Gas and heat prices are up significantly from last year and Federal Reserve Chair Jerome Powell indicated on Wednesday that painfully elevated interest rates will hang around for some time.
It's rough out there, but there is a silver lining: Persistently high Inflation is showing signs of slowing. Finally.
What's happening: The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, rose 6% in October compared to a year earlier, the Commerce Department reported Thursday. That's down from 6.3% in September.
"This morning's data was a Goldilocks report," wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note Thursday. "If inflation keeps coming down, then markets will keep running higher, as investors will conclude that the Fed won't need to raise rates as high, or keep them high for as long, as previously expected."
Inventories of most products are higher, with the notable exception of automobiles, and businesses are pushing discounts. Gas prices also dropped between October and November, which means that inflation could keep slowing.
That's very good news for investors. In a speech at Brookings Institution in Washington Wednesday, Powell said that the Fed could slow the pace of its aggressive rate hikes as soon as December.
Good news on home prices: Fed spirits should also be lifted by one key change: Annual rent inflation is starting to ease across the United States, rising only 0.4% in October. That's the smallest monthly increase since February. It also backs key data that shows the housing market may finally be shifting.
The Case-Shiller US National Home Price Index reported this week that price growth dropped from August to September — from 12.9% to 10.6%. Morgan Stanley also slashed its US home prices outlook.
Even Powell struck an optimistic tone this week. "As long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year," he said. That's significant because housing plays an outsized role in the majority of inflation measures. "Indeed, a decline in this inflation underlies most forecasts of declining inflation," he said.
What's next: The consumer price index is expected on December 13, just one day before the Fed makes its next policy decision. This is the "important report of the year," said Zaccarelli.
It "could confirm the downtrend in inflation," he said. But if inflation surprises to the upside "then all bets are off and we could see a sell-off into year-end — especially if the Fed decides to raise by [three-quarters of a percentage point] the next day, instead of the [half-point] which everyone is counting on."
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