Descending the Mountain

Last week we received the highly anticipated October Consumer Price Index (CPI) inflation data which showed that inflation declined more than the consensus had expected. Specifically, Headline CPI came down to 7.7% from 8.2% the month prior—a fairly decent decline from September to October. The peak in inflation came in June 2022 (9.1%), so the data is moving in the right direction. However, the problem as usual is that all of these numbers remain far above the Federal Reserve’s 2% target. The bottom line is we still have a long way to go, but we’re seeing equity and credit markets rallying around the idea of the Fed potentially downshifting their efforts to cool the economy down. When we look at the inflation trajectory from 1974 to 1984, it took about two years for inflation to come down from its peak. If you follow the historical pattern, we still have several years ahead of us for inflation to normalize. History also tells us that there’s a risk of a second inflation mountain ahead if the Fed turns dovish too quickly.

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