The October CPI--the US's most popular inflation metric--was released this morning, and contained unadulterated good news on inflation. Economic troubles in the U.S. center on persistent inflation and the Federal Reserve Board's mandate to stabilize prices through higher interest rates. Markets have clearly taken this as great news, with the S&P 500 up 4.5% near midday on Oct 10th. But how excited should we really be?
There are good reasons to be patient. A few of the big ones:
- Core CPI has continued to climb. The year-over-year overall CPI has declined, but core CPI, which is a more stable metric that sets aside volatile food and fuel costs, has stayed on a steady acceleration trend.
- The Fed has consistently stated it wants clear deceleration before taking the foot off the brakes. One good month is not going to significantly shift Fed policy. We had one good month back in July, but then August and September were disappointing. That said, this good month opens the door to a policy shift. Now if we see good data for November, that could really look like a true trend!
- It's only the US! US inflation and global inflation are linked, but not fully attached. Other countries face worse inflation challenges, especially since their currencies have weakened relative to the dollar. Their own central banks are also making tough calls to raise rates. Globally easing inflation will be necessary to relax global recession concerns.
Here's the bottom line: We got good news! But it's not world shifting news. Don't get too high off this report today and don't get too low off the next piece of bad news when it comes. Continue to make thoughtful investments that establish robust revenue streams and minimize risk from recession threats such as over-leveraging and excess inventory.