Stocks Jump as Inflation Drops From 3.7% to 3.2%
On Tuesday, the Department of Labor’s monthly report on inflation delivered some much-welcomed news to Wall Street. The highly-anticipated Consumer Price Index (CPI) for October showed the nation’s rate of inflation fell from 3.7% to 3.2%. In response, Wall Street celebrated by driving the major U.S. stock market indexes higher. On Tuesday, the Dow Jones Industrial Average gained 498 points, rising 1.43%. The broad-based S&P 500 rose 1.91%, its best single-day performance since April, while the tech-heavy NASDAQ gained a hefty 2.3%.
October’s drop in inflation marks a turnaround from the recent trend over the past four months. In June, inflation was reported at 3% after steadily declining for 12 consecutive months from a peak of 8.9%. Hopes were high that inflation would continue to gradually decline. However, in July, inflation suddenly jumped to 3.2%. In August and September, inflation surged even higher to 3.7%.
Despite October’s pleasant surprise, the battle against inflation is far from over. Even though inflation has declined from 3.7% to 3.2%, consumer prices are still rising. An inflation rate of 3.2% means that, on average, prices on consumer goods and services are 3.2% higher than they were 12 months ago. Thus, consumer prices are still rising, just at a slightly slower pace. In fact, consumer prices have risen for 41 consecutive months. The ultimate goal is to return to a target rate of inflation of just 2%. However, the economy hasn’t had an inflation rate at or below 2% since February 2021 (1.7%).
The decline in the inflation rate was led by a 2.5% decrease in energy prices. But energy prices remain a highly volatile category. In August and September, the price for a barrel of crude oil quickly rose nearly 19% in just over 30 days, sending energy prices surging higher.
Other basic necessities remain stubbornly high. In October, food prices rose 0.3%, the largest monthly increase in eight months. Food prices have risen for 39 consecutive months. Since February 2021, food prices have risen a staggering 20%.
The cost of shelter also remains a significant challenge for consumers. Historically, shelter accounts for 33% of the overall CPI – by far the most of any component. Shelter costs rose another 0.3% in October and have increased by 6.7% over the past 12 months. Since February 2021, shelter costs have risen by more than 17%.
According to the U.S. Federal Reserve, inflation is expected to remain above 2% through 2026. That’s three more years of excessive strain on consumers, businesses and, ultimately, the U.S. economy. But in the meantime, October’s inflation report was at least a step in the right direction.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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